Real estate loans, inflation, debt… What will change the historic increase in the key rates of the ECB

Real estate loans, inflation, debt... What will change the historic increase in the key rates of the ECB

A historic decision. The European Central Bank (ECB) announced an unprecedented increase in key rates (0.75 points) on Thursday 8 September. A first for the guardian of the single currency, which is trying to cope with record inflation, at 9.1% over one year in August in the euro zone. The ECB, long reluctant to raise its interest rates, had already announced a surprise rise of 0.5 points in July.

The objective of the institution is to slow down the economy to bring down inflation, fueled by the explosion in energy prices. Bound to guarantee a 2% inflation rate in the euro zone, the ECB has long been opposed to raising rates, fearing that the European economy could plunge into a recession. So what does this decision actually mean? What impact will it have on the finances of Europeans? Response elements.

Home loan rates will go up

This is one of the most tangible impacts. By raising its key rates, the ECB will cause an increase in mortgage rates, which means that those who buy property will pay more to repay 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. increase of many actors”, explains to franceinfo Laurence Scialom, professor of economics at the University of Paris Nanterre. In France, the average borrowing rate has already increased from 1% in January to 1.9% at the beginning of September.

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

Inflation is expected to slow…

By increasing its key rates, and therefore the cost of borrowing, the ECB is seeking to slow down the economy of the euro zone. “It will cost more to borrow, to take out mortgages and it will reduce demand. For example, it will be more difficult to borrow for a new car”, explains to franceinfo Baptiste Massenot, professor of economics at Toulouse Business School. The specialist believes that the ECB should “succeed your bet, 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 do not have a price-wage loop in Europeis alarmed Laurence Scialom. On the other hand, there is a real loss of household purchasing power. One may wonder whether raising interest rates is the right instrument. We could have chosen to leave inflation high, with redistribution measures. The situation should not return to normal immediately anyway. The ECB thus forecasts 8.3% inflation for 2022, 5.5% in 2023, before a return to 2.3% in 2024.

… with a 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 other major central banks began a cycle of rate hikes. But for Baptiste Massenot, the ECB didn’t really have a choice: “She can’t do much about this supply shock, she has to choose between plague and cholera. Either it lowers inflation, but with a risk of recession, or it lets inflation slip away and the cost of living increases very sharply”.

The euro should regain strength against the dollar

In addition to inflation, the sharp drop in the euro against the dollar worries the ECB. The single currency is currently trading at 0.99 cents per dollar, unheard of for over a year. The problem, “it’s that it’s an additional channel of inflation, since energy prices are billed in dollars”Explain Laurence Scialom. A weak euro inflates the bill for imported products, which fuels inflation. Its increase against the dollar could therefore mechanically slow down the rise in prices.

State debts will be more expensive to repay

European states will also be affected by this increase. Borrowing 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 deemed vulnerable, such as Italy or Greece, could find themselves in difficulty in the face of speculative attacks on their debt. “The ECB could decide to finance these countries directly by buying the bonds they have issued. It’s not really allowed, but it’s possible”however, emphasizes Baptist Massenot. A mechanism that the ECB was already ready to implement if necessary this summer.

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