Funcas appeals to "prudence" when raising rates so as not to "fragment" the financial markets

MADRID, 14 Jul. (EUROPA PRESS) -

Funcas considers that the actions of the central banks to contain inflation "are being more aggressive than expected" and appeals to "prudence" when raising interest rates to avoid a "fragmentation" of the financial markets.

In his last issue of 'Cuadernos de Información Económica', Funcas addresses the dilemma facing central banks, especially the European Central Bank (ECB), in the current scenario of price increases.

In an article written by Santiago Carbó and Francisco Rodríguez, the authors warn that the pace of interest rate hikes can cause difficulties, so it must be carried out "with prudence".

"The effects on the yield curves of the public bonds of the euro area can be especially harmful not only for the sustainability of the public debt of some countries, but also for the general financing conditions, public and private, because a fragmentation of the financial markets", they warn.

Carbó and Rodríguez explain that the decisions of the central banks have been "more drastic" as the structural nature of inflation and the lack of confidence of consumers and markets about the time it may take for the rise in prices to subside have been observed.

Regarding the impact on the banking sector of the interest rate hikes, they consider that, on the one hand, it could improve the intermediation margin, but, on the other, they warn that "high inflation and an environment of uncertainty open up unknowns about the evolution of future growth rates that would also have an impact on the banking business".

In another article in 'Cuadernos', Marta Alberni, Ángel Berges and María Rodríguez explain that, on the positive side, the tightening of the long sections of the curve heralds a horizon of short rate hikes that will make it possible to overcome the "crossing the desert " of more than five years with rates in negative territory and with the consequent downward pressure on bank margins.

On the other side of the balance, in the face of a rate hike, the authors anticipate two adverse effects: on the one hand, its potential negative impact on the payment capacity of households and companies and, therefore, on their future delinquency and, on the other, the potential losses in value of public debt holdings. However, they specify that this type of impact "is very far from being similar in advanced countries to those that occurred during the international financial crisis."

In terms of their weight over assets or the domestic bias of sovereign debt, they underline that the position of Spanish banks is very similar to that of European banks and is mitigated by less sensitivity to the curve, as well as in terms of lower accounting outcrop in results.

On the other hand, in the latest issue of 'Economic Information Notebooks', Funcas makes a preliminary approximation to the effects of the crisis on income inequality in Spain during 2020, the first year of the pandemic.

Taking recent data from the Living Conditions Survey, the article, prepared by Eduardo Bandrés, highlights the decisive nature of public transfers (unemployment, aid for the self-employed, temporary disability) in correcting most of the inequality associated with the work stoppage of economic activity and its effects on employment and household income.

Despite this, the inequality of disposable income increased slightly in 2020, especially due to the drop in income among the poorest 10% of the population, which is mainly made up of workers with low wages, the unemployed and the inactive population, among the youth predominate.

The author concludes that the persistence of situations of poverty in Spain cannot be attributed to the pandemic crisis, but rather to factors of a more structural nature related to low levels of education and employability of part of the population, insufficiency of the minimum income system, scarcity of aid to the family and the limited amount of non-contributory pensions.