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 a currency, which is trying to cope with record inflation, at 9.1% over a year in August in the euro zone. The ECB, which has long been reluctant to raise its interest rate, has already announced a surprise increase of 0.5 points in July.

The purpose of the institution is to slow down the economy to reduce inflation, due to the explosion of energy prices. Bound to guarantee a 2% inflation rate in the euro zone, the ECB has long been against raising rates, fearing that the European economy could fall into a recession. So what does this decision really mean? What effect does this have on the finances of Europeans? Response elements.

Home loan payments will increase

This is one of the most visible effects. By raising its key rates, the ECB will cause mortgage rates to rise, meaning that those who buy property will pay more to pay off their mortgage. “We will also see an increase in the needs of banks to guarantee these loans, because we will face financial fragility. adding more actors”, explains franceinfo Laurence Scialom, professor of economics at the University of Paris Nanterre. In France, the average borrowing rate has risen 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 get liquidity from the institution. Banks then pass this increase on to their customers. This increase still needs to be controlled in France, points out the economist:We are lucky because other countries, with a variable rate, see a monthly increase in payments for borrowers who have already obtained a loan, which is not the case in France. “

Inflation is expected to moderate…

By increasing its key rates, and therefore the cost of borrowing, the ECB aims to slow down the euro zone economy. “It costs more to borrow, take out loans and this reduces demand. For example, it is more difficult to borrow for a new car”, explains franceinfo Baptiste Massenot, professor of economics at the Toulouse Business School. The specialist believes that the ECB should “your bet will be successful, because the real estate market should break the number”. He even envisioned it as possible “low energy prices”.

An analysis not shared by all economists. “Unlike the United States, we don’t have a wage-price loop in Europealarmed Laurence Scialom. On the other hand, there is a real loss of household purchasing power. One may wonder if raising interest rates is the right instrument. We could have chosen to leave high inflation, with redistributive measures. The situation should not return to normal immediately. The ECB thus predicts 8.3% inflation for 2022, 5.5% in 2023, before returning to 2.3% in 2024.

… with economic risk

This is the main concern of governments. By raising its rates and reducing demand, the ECB risks slowing consumption when growth in the euro zone is already weak. It is the risk of recession that has slowed the action of the European institution this year, while other major central banks have started a cycle of rate increases. But for Baptiste Massenot, the ECB really has no choice: “He is there was not much he could do about this supply shock, he had to choose between pestilence and cholera. It either lowers inflation, but there is a risk of recession, or it allows inflation to disappear and the cost of living to rise too fast”.

The euro should regain strength against the dollar

In addition to inflation, the sharp decline of the euro against the dollar worries the ECB. A currency is now trading at 0.99 cents per dollar, which is unheard of in over a year. The problem, “This is an additional path to inflation, because energy prices are charged in dollars”declare Laurence Scialom. A weak euro inflates the bill for imported goods, fueling inflation. Its rise against the dollar could mechanically slow the rise in prices.

State debts are more expensive to repay

European states will also be affected by this increase. Borrowing is more expensive for governments, which have financed most of their spending with money borrowed at zero or negative rates in recent years. Very states in debt and considered weak, such as Italy or Greece, may find themselves in trouble in the face of speculative attacks on their debt. “The ECB may decide to finance these countries directly by buying the bonds they issue. This is not really allowed, but it is possible “but, emphasizes Baptist Massenot. A mechanism that the ECB is ready to implement if needed this summer.

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