Newspaper article The Christian Science Monitor

The Cost of Borrowing Inching Up

Newspaper article The Christian Science Monitor

The Cost of Borrowing Inching Up

Article excerpt

- Want to borrow money in New Zealand? The interest rate is more than half a percentage point higher than in January. Europeans are facing similar bank-account-sapping news. And in the US, a 30-year fixed-rate mortgage now costs at least a third of a percentage point more than in January.

It's all part of a major shift taking place in the global economy: Borrowing is becoming more expensive.

In Europe and other foreign industrialized countries, central banks are raising rates to try to keep inflation down as their economies become more robust. This may limit their economic growth later this year or next year.

In the US, the cost of home loans, corporate loans to build new factories, and interest expense on the federal deficit has hit the highest level in about a year. Economists worry that long-term rates will move even higher. This could prolong the downturn in the housing market and cast doubts on the future direction of capital markets. Last week, the Dow Jones Industrial Average lost 243.72 points.

"Broadly speaking, higher interest rates will weigh on economic growth," says Mark Zandi, chief economist at Moody's Economy.com. "You could argue that higher interest rates reflect a better economy, but the catalyst goes beyond that: It's all part of a global trend of sopping up liquidity."

Money became relatively inexpensive after the dotcom bust, which began in 2000, and the subsequent recession. In the United States, the Federal Reserve lowered short-term rates to as low as 1 percent, and mortgage rates dipped to as low as 4.75 percent.

Rates remained relatively low for several years. "Now, the central banks are taking that away," Mr. Zandi says.

The shifting global landscape coincides with a changing view on Wall Street about the future direction of Federal Reserve policy. "A few months ago, the markets felt there was a 90 percent probability of a Fed rate cut by year-end," says Lyle Gramley, a consulting economist at Schwab Washington Research Group. "Now, there has been a sea change in opinion in the markets where the Fed is headed."

Wall Street now considers it unlikely the Fed will touch interest rates through the end of the year. "The Fed has been saying with great consistency that of the risks it confronts, inflation remains the greatest," says Richard DeKaser, chief economist at National City Corp. in Cleveland. (The Fed views interest-rate policy as a way to keep inflation in check.)

On Thursday and Friday of this week, the government will report the inflation numbers for May. The core Consumer Price Index, which strips out food and energy costs, should come in at 0.2 percent, predicts economist Peter Morici of the University of Maryland School of Business in College Park.

"If we get this, it is above the Fed's target, which means the Fed can't lower rates at this time despite the weak pace of economic activity," says Mr. …

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