After the decision of the Fed , the American central bank, to raise interest rates by 0.25% , bringing them to the highest since September 2007, now comes the announcement of the ECB : the cost of money will increase by another 50 cents from today by pushing the reference rates for bank refinancing operations to 3%, the highest since 2008.
Given the pressure of inflation, the governing council intends to raise rates by another 50 basis points at its next meeting in March , as announced by Christine Lagarde. The goal, specifies the president of the ECB, is to curb inflation which in January in the eurozone began to show some signs of a slowdown, reaching 8.5%, but a value that is still far from the 2% which sets the course of the monetary policies of the Frankfurt Institute.
The Governing Council will continue to increase interest rates significantly at a constant pace and to keep them at levels restrictive enough to ensure a timely return of inflation to its 2% target over the medium term. In the light of underlying inflationary pressures, it intends to raise interest rates by another 50 basis points at the next monetary policy meeting in March, and then assess the subsequent evolution of its monetary policy.
But what are the consequences ?
MORTGAGES AND THE REAL ESTATE MARKET – Since the ECB started raising interest rates in 2022, the first effects have been evident precisely on mortgages . And above all on the monthly installments that first-time home buyers are required to pay : the variable-rate mortgage has become less convenient than the fixed-rate one, which is also more expensive.
With a rise in interest rates by the ECB of 50 basis points, the average loan installment (140,000 euros in Italy) could in particular rise up to 35 euros every thirty days . In about a year, therefore, whoever pays the mortgage could pay out 200 euros more , or 43% additional to the initial sum . And in consideration of the further increases in rates that are expected for the coming months, the mortgage could become more onerous up to 255 euros a year .
Therefore, the repercussions on the real estate market are heavy and consequential, where demand is linked to a loosening of interest rates. Basically, if the installments increase, fewer houses are bought and the effect is potentially recessive.
FIRMS – An increase in the cost of money means that it becomes more onerous for firms to ask for loans from banks , which require higher rates. A trend that can therefore translate into lower investments , or less growth, and higher unemployment . A phenomenon which adding up to stratospheric energy bills fears an even more lurking specter of recession .
SAVINGS – With a rising interest rate policy, so do savings rates . Leaving money in savings accounts , therefore, could lead to some gains . However, keeping money in deposits also means reducing consumption and slowing down the economy . An objective of the ECB, which in this way thinks of curbing demand and therefore prices at the same time. But a move that leads to the economic slowdown .
PUBLIC DEBT – Among the major criticalities of the Italian State, there is the high public debt. With higher interest rates, the state will find itself forced to pay interest charges to the heaviest creditors , thus significantly burdening the public finances. The ten-year government bond already yields more than 4% and a jump in the spread, for example, of 100 points can trigger public spending of 19 billion more in three years : 2.5 billion in 2023, 6.7 billion in 2024 10.1 billion in 2025, according to end-of-year studies by the Parliamentary Budget Office (UPB).
EURO-DOLLAR RELATIONSHIP – An aggressive policy by the ECB, intending to raise rates much longer and even more than the Fed, could also cause the euro to appreciate against the dollar. A move that results in cheaper imports than exports . But that could have the effect of a recession.
(Unioneonline/vl)
