Real estate loans, inflation, debt… What will the historic rise in the ECB’s reference rates change?

Real estate loans, inflation, debt... What will the historic rise in the ECB's reference rates change?

A historic decision. The European Central Bank (ECB) announced on Thursday, September 8, an unprecedented rise in reference rates (0.75 points). A novelty for the guardian of the single currency, which is trying to deal with record inflation of 9.1% per year in August in the euro zone. The ECB, long reluctant to raise interest rates, had already announced a surprise 0.5 point hike in July.

The goal of the institution is to slow down the economy to reduce inflation, fueled by the explosion in energy prices. Forced to guarantee a 2% inflation rate in the euro zone, the ECB has long opposed raising rates, fearing the European economy could slip into recession. So what does this decision really mean? What impact will it have on the finances of Europeans? response items.

Mortgage loan rates will go up

This is one of the most tangible impacts. By raising its key rates, the ECB will cause mortgage rates to rise, meaning those who buy property will pay more to pay off their loan. “We are also going to see an increase in the demands on banks to guarantee these loans, because we are going to face financial fragility. rise of many actors”, explains to franceinfo Laurence Scialom, professor of economics at the University of Paris Nanterre. In France, the average interest rate on loans has already increased from 1% in January to 1.9% at the beginning of September.

By raising its reference rates, the ECB makes money more expensive for commercial banks, which obtain liquidity from the institution. The banks then pass this increase on to their customers. This increase still needs to be controlled in France, the economist underlines:We are lucky because other countries, with a variable rate, will see monthly installments increase for borrowers who have already taken out a loan, which is not the case in France.”

Inflation is expected to decline…

By raising its reference rates and thus the cost of borrowing, the ECB intends to slow down the euro zone economy. “It will cost more to borrow, take out mortgages and demand will be reduced. For example, it will be more difficult to borrow for a new car”, explains to franceinfo Baptiste Massenot, professor of economics at the Toulouse Business School. The specialist believes that the ECB should “Get your bet right, because the real estate market should break the figure”. He even foresees a possible “lower energy prices”.

An analysis that is not shared by all economists. “Unlike the United States, we don’t have a cycle of prices and wages in Europeis alarmed Laurence Scialom. On the other hand, there is a real loss of purchasing power of households. One wonders if raising interest rates is the right instrument. We could have chosen to leave inflation high, with redistribution measures. The situation shouldn’t return to normal immediately anyway. The ECB thus forecasts inflation of 8.3% for 2022, 5.5% in 2023, before returning to 2.3% in 2024.

… at risk of recession

This is the main concern of governments. By raising its rates and reducing demand, the ECB risks significantly slowing consumption when growth in the euro zone is already weak. It is this risk of recession that had slowed down the action of the European institution this year, while the rest of the large central banks began a cycle of rate hikes. But for Baptiste Massenot, the ECB really had no choice: “She he can’t do much with this supply shock, he has to choose between plague and cholera. Either lower inflation, but with the risk of recession, or let inflation run away and the cost of living rise very sharply.”.

The euro should regain strength against the dollar

In addition to inflation, the sharp fall of the euro against the dollar worries the ECB. The single currency is currently trading at 0.99 cents on the dollar, the highest in more than a year. The problem, “is that it is an additional channel of inflation, since energy prices are billed in dollars”explain Laurence Scialom. A weak euro inflates the bill for imported goods, fueling inflation. Its rise against the dollar could therefore mechanically slow down the rise in prices.

State debts will be more expensive to pay

European states will also be affected by this increase. The loans will cost more for governments, which have been financing much of their spending with money borrowed at zero or negative rates in recent years. states very in debt and those considered vulnerable, such as Italy or Greece, could find themselves in difficulties due to speculative attacks on their debt. “The ECB could decide to finance these countries directly by buying the bonds they have issued. It is not really allowed, but it is possible”however, it emphasizes Massenot Baptist. A mechanism that the ECB was already willing to implement if necessary this summer.


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