this European Central Bank (ECB) launched in recent months rapid increase in rates interest in fighting spiral inflationist. It surprised him with a 0.5 percentage point increase in July: double what he expected at the June meeting. for over twenty years, the largest and the first in 11 years. In September, he approved a new 0.75 percentage point increase in the money price (an extraordinary magnitude, first time received since it began to set rates January 1999), up to 1.25%. They government council meeting this Thursday to confirm new risewhich is the market waits let it be again 0.75 pointsup to 2%.
Why is the ECB moving?
main jurisdiction ECB to keep the CPI for the euro area at 2% in the medium term.. However, current inflation is far from this target and expectations are getting worse. Prices rose from 9.1% in August to an all-time high of 9.9% in September. The central bank’s September price forecasts are 6.8%, 3.5% and 2.1% in June, compared to an average of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. Raised to . In other words, it will be slightly above the CPI target at the end of the three-year scenario on which it bases its decisions.
Why does rate hike serve to fight inflation?
Rate hikes serve to cool the rise in prices by making finance more expensive for governments, companies and families, thereby slowing demand. In reality, they are more effective when they occur in response to the overheating of the economy (strong spending and investment), but are more limited when prices rise for other reasons not specific to economic activity, such as the current increase in Energy. . But they are the main weapon that central banks have against inflation, so they have been activated in the face of high price levels, despite the economic cost.
Why expect 0.75 more points?
Like other central banks, The ECB estimated this to be a temporary phenomenon last year when inflation started to rise. The post-pandemic reopening of the economy has borne fruit, so it has decided not to raise interest rates. The invasion of Ukraine and its effect on energy prices upset the plans of the monetary authorities. The European institution started raising interest rates later than its peers because it came from a lower level, and is now accelerating to regain lost ground.
However, there have been voices in recent meetings advocating more moderate increases than those ultimately approved. There are two spirits in the ECB’s board: managers (“pigeons”) who advocate a flexible and broad interpretation of its mandate that take more account of the economic situation, and those who advocate sticking to the goal of price stability (“hawks”). ). Contrary to what has happened in recent years, they have been winning the debate in recent months with their commitment to aggressive rate hikes to try to reorient the inflation outlook as soon as possible.
The 0.75 point increase is extraordinary. Since its inception, the ECB has lowered or increased 26 points by 0.25 points, 13 times by 0.5 points and only twice by 0.75 points (before the September increase, it had only approved approval of this reduction). (It was in 2008 after 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 August) and although GDP continues to grow (0.8% in the second quarter), there are early indications of recession. The ECB is well aware of this. In September, it cut its GDP forecasts to 3.1% in 2022, to 0.9% in 2023 and to 1.9% in 2024. But in this central scenario; Negatively, it calculated a 0.9% decline in the euro area economy next year. The higher the rate hike, the greater the risk of such a recession occurring.
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 serve as a reference for the rest of the interest rates; euriborIndicator that 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.
Euribor, in fact, started to rise from a historic low of -0.505% in November to 2.233% in September at the end of last year. It’s already over 2.7% lately. This makes mortgage payments more expensive and will do so more prominently in the coming months. Also, new loans are more expensive: The average interest rate on new mortgages rose from 1.38% at the end of last year to 2.03% in August, while that on consumer loans rose to 7.09% from 6.1%. To the extent that the ECB raises rates more or less, household finance will become more or less expensive, especially since this Thursday’s increase will not be the last but surprises.
And for companies and governments?
Bank financing for companies has become more expensive. The average rate of new loans to companies increased from 1.24% in December to 1.6% in August. 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. 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 3.2%. As in the household situation, the higher the ECB rates, the more expensive the financing of companies and States will become.