Through the voice of Christine Lagarde, the ECB announced last Thursday a new…
Through the voice of Christine Lagarde, the ECB announced last Thursday a new rate hike by +0.75%. What are the consequences of this decision, which puts an end to negative interest rates, low or cheap money, which has allowed States to borrow at low cost and banks to offer very low loan rates to their borrowing customers?
1 Curb inflation?
According to the ECB, inflation hitting consumers’ wallets should reach 8.1% on average in Europe this year. It is partly to curb this galloping inflation that the Central Bank is raising its key rates and increasing the “price” of the money it lends to the banks.
Clearly, the ECB hopes to promote savings and curb consumption to influence lower demand and bring down prices, and therefore inflation, by slowing down the economy of the euro zone. Faced with the explosion in energy prices, the ECB knows that its objective of bringing inflation down to 2% will not be achieved in 2023, or even 2024. Other increases in key rates are therefore looming to approach the desired inflation threshold.
2 Consumer credit and real estate more expensive
By raising its key rates, the ECB is actually making the money it lends to commercial banks more expensive. These pass on this revaluation to the rates of the loans they grant, whether for consumer credit or real estate.
Between last July and this month of September, the average mortgage rate in France rose from 1 to 1.9%. If these increases weigh in fact on the cost of new projects, the positive fact is that in France, we practice little variable rates, so these increases will have no impact on the monthly payments of households.
3 Towards tax increases?
The increase in key rates decided by the ECB means, for the States that borrow, a greater effort to repay the charges or interest linked to this debt. To finance their expenses, some European countries, including France, have borrowed very heavily but at zero or even negative rates, thus limiting the financial burden of repayment. This situation, which was anything but normal, has come to an end.
