Tuesday, 24 June 2008

Prime Rate Up, One After The Other...

Now it's Pohjola Bank (OP) that raise its OP-prime Rate.

"On 24 June 2008, OP-Pohjola Group Central Cooperative's Executive Board decided to raise OP-Pohjola Group's OP-prime reference rate from 4.50 per cent to 5.00 per cent, effective as of 8 July 2008. The decision is based on rising market interest rates. The prime rate was last revised in May."

After Aktia, Nordea, OP is under pressure to raise its prime rate to 5%.

I'll bet that it can quite easely reach 6% by year end if inflation expectation is deteriorating at the currently witnessed pace.

Just by discussing with people around me, they are all raising the alarm concerning food price that are rising by 6-8% if not double digits. It's clear that companies are passing their price to the consumer without a second listening to the ECB warnings not to do so: That's the way Finland is after all, it always overshoot...

Now the best case scenario is a sharp slowdown of the economical activity in order to see lower interest rates. There is a price to pay for that: higher unemployement and asset corrections.

After all we can quite easely fall into the deflationnary trap: going from High inflation to a deflation (oil and asset prices plummeting).

Stock markets are indicators of the health of the economy and since they are forward looking indicators, it presages a sharp slowdown in the next year or so. Housing indicator is a lagging indicator usually peaking when the economical downturn had already started and picking up when the economy has already recovered.

As some readers pointed out, the Japanese scenario is not be excluded and could be disastrous for homeowners. The japanese mistake is attributed on the political side and on banks hiding huge losses. If such phenomenon were to occur, the downturn could be long and painfull...

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