Interest rate hikes were expected, albeit at slower pace, says economist

The rise in interest rates is impacting many organisations’ investment portfolios, and by extension, the economy as a whole, economist and KPMG board Tassos Yiasemides said on Thursday.

“The reduction in the value of financial assets will lead to significant losses if there is no proper dispersion of risk,” Yiasemides stated during an interview with the Cyprus News Agency.

In addition, Yiasemides, who was asked to comment on the continuous interest rate hikes by central banks and the turmoil created in the global banking sector, said that the increase in borrowing and funding costs is leading to a decrease in business activity and investment, limiting the prospects of many economies.

He said the purpose of raising interest rates is to reduce consumer demand, but at this time, he said, “there are serious issues such as the inability to meet product needs, deglobalisation and supply chain issues that are keeping inflation high levels despite its slowdown”.

However, Yiasemides explained that the prolonged period of low and negative interest rates through the central banks’ quantitative easing programs, although designed to be adopted temporarily, remained in place for a long time due to the financial crisis, the spread of the coronavirus and other negative developments.

“The provision of liquidity may have inadvertently driven prices higher, while a significant part of it was channelled into the money markets and into investments in movable and immovable values,” he said.

Moreover, he noted that the measure was expected to be temporary and that there would inevitably be gradual interest rate increases at some point in time.

“What may not have been expected is the pace at which rates would be raised, which, in addition to the borrowers, affects the economy itself but also the investment portfolios of many organisations with the resulting reduction in valuations,” he concluded.