By raising rates, the ECB seeks to contain the surge in inflation in the euro zone (Photo credit: 123RF)
The ECB (European Central Bank) announced on Thursday 21 July an increase in its key rates by 0.50%. What are the consequences of this decision for life insurance?
ECB rate hike
This had not happened since 2011. Thursday, July 21, the ECB raised key rates by 0.50%, a much stronger increase than expected since it was expected to be around 0.25%. By raising rates, the ECB seeks to contain the surge in inflation in the euro zone, estimated at 8.6% in June 2022 (annual), in a context marked by the war in Ukraine, the slowdown in economic growth and the political crisis in Italy. Indeed, the rise in key interest rates should cause a rise in credit rates for individuals, and thus curb consumption and then the rise in prices.
According to the European Commission, inflation in the eurozone should fall to 4% next year, a level still far from the ECB’s 2% target. It is therefore likely that the ECB will proceed with further hikes by the end of the year.
By raising the rates, the institution must however take care not to worsen the situation of the most indebted States too much. Since the announcement in June of a tightening of ECB policy, European government borrowing rates have risen: for example, the 10-year Italian government borrowing rate stands at 3, 45% on 07/22. Christine Lagarde, President of the ECB, explained that the Governing Council might resort if necessary to the “IPT” program (instrument for the protection of transmission) which provides for potentially unlimited debt purchases to protect States in difficulty.
What are the consequences for life insurance?
Life insurance funds in euros are composed on average of 80% government and corporate bonds. The rise in interest rates should therefore have an impact on the performance of funds in euros, even if this should only rise gradually because insurers only buy new bonds as the bonds in stock mature. . The return on euro funds should rise, but less quickly than bond interest rates.
The remuneration of the booklet A, which depends in particular on inflation, must drop to 2% on August 1st. Savers might be tempted to switch funds in euros to passbooks. If this were the case, this might put insurers in difficulty because they would then be obliged to liquidate bonds in stock (bonds with low yield and which have therefore lost value) and record capital losses. However, in the event of excessive difficulty, the Sapin 2 law authorizes the HCSF (Haut Comité de Sécurité Financière) to limit the possibility for savers to make payments into the fund in euros of their contract, suspend or restrict the possibility of withdrawing their savings or limit the distribution of dividends.