The ECB is split between 0.5 or 0.75 percentage points of increase: What implications does this have?

Why is the ECB moving?

The main task of the ECB is CPI Eurozone 2 percent in the medium term. However, current inflation is far from this target and expectations are getting worse. Prices hit an all-time high of 9.1% in August, from 8.9% in July. The central bank will present its new inflation forecasts on Thursday, but in July it had forecast the CPI to be slightly above its target at the close of the three-year scenario on which it based its decisions (6.8% in 2022, 3.5% in 2023 and 2% in 2024). ,one). These forecasts are likely to be revised upwards as energy and food prices continue to rise. gas supply interruption It seems to be happening from Russia to Europe, and inflation in various products and services is becoming more persistent and more pervasive. The further inflation moves away from the 2% target in 2024, the more pressure the ECB will have to raise interest rates and try to get it to that level.

Why does raising interest rates serve to fight inflation?

Interest rate hikes serve to cool the rise in prices. make financing more expensive To states, companies and families, thus curbing demand. In fact, they are most effective when they occur in response to a situation. economy overheating (strong spending and investment), effectiveness is more limited when prices rise for other reasons not specific to economic activity, such as the current rise in energy prices. However, they are the main weapon that central banks have against inflation, so they have activated it in the face of high price levels, despite the economic cost it may entail.

Why is there a debate between 0.5 and 0.75 points?

There are two spirits in the ECB board: consultants advocating a flexible and broad interpretation of his task, which takes greater account of the economic situation (‘pigeons’) and Those who advocate adhering to the goal of achieving price stability (‘Hawks’). The first has advocated a gradual increase in rates in recent weeks to allow economic agents to gradually adapt to it, modulate its impact on the economy, and have more room to act if the outlook for GDP and CPI changes significantly. The latter, however, advocates being more aggressive to steer the inflation outlook as soon as possible and send a strong message. To put it in perspective, the ECB has lowered or increased by 0.25 points 26 times, 0.5 points 13 times, and 0.75 points only once since its inception (and it was a decrease, not an increase, after 2008). The Lehman Brothers debacle that triggered the Global Financial Crisis).

What effects might it have on the economy?

Unemployment in the euro area is at its lowest (6.6% in July) and although GDP continues to grow (0.6% in the second quarter), there are indications of recession. The ECB is well aware of this. “There are strong indications that growth will slow, and I wouldn’t rule out that we’re going into a technical recession.Isabel Schnabel, one of the most influential members of the executive committee, said a few weeks ago, especially if Russia’s energy supply is cut further. room to raise rates more sharply as a more severe recession is predicted.

What does it mean for homes?

Interest rate hikes make financing more expensive for households, companies, and Governments to cover their spending and investments. The official rates therefore act as a reference for the rest of the interest rates, such as Euribor, the benchmark with which most floating rate mortgages in Spain are linked. The effect begins to be felt even before official rates rise. Therefore, central banks tend to give advance hints about their next move, and the market tries to anticipate them, causing private interest rates to rise or fall before the official ones. In fact, Euribor started rising to 1.249 last August, from a historic low of -0.505 in November at the end of last year. Already over 1.8% in the first days of September. this increase mortgage payments. Also, new loans are getting more expensive: the average interest on new mortgages rose from 1.38% at the end of last year to 1.8% in July, while that on consumer loans rose to 6.82% from 6.1%. To the extent that the ECB raises rates more or less (0.5 or 0.75 percentage points), household finance will become more or less expensive, especially since the September increase will not be the last but surprise.

And for companies and States?

Bank financing for companies has become more expensive. The average rate of new loans to companies increased from 1.24% in December to 1.67% in July. The rise in the official price of money, in addition to stopping the ECB from borrowing, has made it more expensive for investors to place securities available to both companies and States on the market. ANDThe Spanish Treasury, for example, issued 4,650.51 million euros in six- and 12-month bonds on Tuesday, at a rate of 0.880% in the first case. (in the August auction this ratio was 0.465% and -0.662% in December) and 1.423% in the second (compared to 0.795% and -0.595% in the previous December). In the secondary market (buying and selling between investors), the interest required to buy Spanish 10-year bonds rose from 0.578% at the beginning of the year to 2.8%. As in the household case, the more the ECB surprises the market with higher rate hikes, the more expensive it will be to finance companies and governments.