After a long period of very low interest rates, the favourable economic conditions and the expected trend in inflation justify starting the gradual normalisation of monetary policy in the euro area by the end of 2018. In that context, this article presents an overview of the possible consequences of a rise in interest rates for the euro area and Belgian economy. It shows that the macroeconomic impact of that normalisation depends on the factors behind the increase in interest rates. For example, if the rise is due to a reduction of the tensions depressing demand, the higher interest rates accompany sustained growth and inflation. Conversely, an interest rate rise due to an unexpected tightening of monetary policy or negative supply shocks could coincide with contractionary effects on the real economy.

There are various reasons why the next interest rate rise may be different from past increases. The interaction with non-standard monetary policy measures is one of them: the reinvestment of the principal payments from the assets purchased by the central bank may continue to compress the term premium, even if interest rates are rising. That situation tends to flatten the yield curve, and it also risks blurring the signals given by the yield curve concerning the likelihood of an economic recession. At the same time, the central banks could incur losses on their bond portfolios acquired during the implementation of the asset purchase programmes.

Furthermore, the interest rate rise will take place in a context of high debt levels, which could have implications for financial stability. The article shows that the effects could vary greatly, however, both between countries and between sectors. They depend in particular on balance sheet structures and the transmission of interest rate increases. Regarding the public sector, the differential between economic growth and interest rates is expected to remain exceptionally favourable for some time yet in most euro area countries.  As for the non-financial private sector, the repayment burden – which is already relatively high for Belgian households -  could increase further, but that effect will be weaker in the case of fixed-interest loans. In the medium term, the higher rate could also have a beneficial effect on the repayment burden via the reduction in debt ratios.

The article ends with an open question concerning the evolution of the remuneration of bank savings deposits following a rise in interest rates. While banks could try to maintain their deposit rates at low levels to improve their profitability, other factors, such as the greater ease with which households can transfer their deposits to other institutions or convert them into other forms of investment, may put pressure on banks to pass on the higher market interest rates in their deposit remuneration.