The Federal Reserve (Fed) has already done that, and it will be the European Central Bank (ECB) raising rates in the next few hours. These are more moderate increases, about 0.5 points. Both decisions make it possible to continue to contain price growth, but will have implications for the finances of companies, government and individuals.
How do high rates affect the state?
In a country as indebted as ours (1.5 trillion euros) Increase in interest rates affects the budgetBecause the debt that needs to be issued to replace the existing one and close the gap will be accrued at higher rates. The government’s strong tax collection due to inflation prevented the budgetary catastrophe of 2022 that the economic slowdown could bring, but this inflation may finally turn against the 2023 budget due to measures taken to contain it.
If the deficit does not fit in the expected 3.9, the extraordinary need for financing will make the over 31,000 million interest bills more expensive, which is estimated to represent 15.5% of the government’s current expenditure (12.6% when investments are taken into account). , subsidies and other income transfers) and 5.4% of the total expenses of all administrations. Therefore, we can confirm that 5.4 percent of every hundred euros spent, deposited or transferred by all governments will go towards paying interest., if the accounts are balanced. This isn’t a particularly dramatic scenario, but it will depend on how sluggish the economy is. If the deficit rises, the situation will obviously worsen, and interest spending could rise to just over the targeted 1.1 billion mark in 2023. While the ECB will take care to avoid this, it will not be a concern unless the market begins to discriminate against euro risk premiums as it did in 2012.
How do high rates affect companies?
The Bank of Spain predicts that the increase in the financial burden of debtor companies will be between 5% and 7%.will affect lower profits, price increases and make business finance more difficult in general. Credit activity is sluggish and after the surge due to the pandemic, banks are focusing on renewals and refinancing, but loan balances to the productive sector are not increasing. It is predicted that the delinquency will increase and it will no longer be possible to continue kicking the damaged bag of ICO credits forward. As such, the job of SMEs in need of financing will become even more difficult because banks will be extremely cautious while providing expensive and scarce loans. Increasing numbers of bankruptcies and company liquidations are coming, but scenarios are not expected to be as dramatic as in previous crises, mainly because the level of corporate indebtedness is generally manageable due to the de-leveraging process of the past decade. The bank debts of companies are similar to 15 years ago.
Very large companies whose financing depends on the financial market rather than banks will have to issue much higher rates in line with the fixed income market. We already see core inflation approaching the CPI, indicating that companies are trying to compensate for cost increases through prices.including an increase in financing costs.
As a result, SMEs will have to look for alternative financing sources to their bank debts, increase their equity, which they cannot always do, and then try to improve their operational finance by paying their suppliers. Therefore, the default between companies will increase and the payment terms of commercial debts will be extended. Companies will ultimately have lower profits, which, along with the increase in financial expenses, will minimize their investment.
How do high rates affect individuals?
A distinction must be made between those who borrow at a variable rate and those who do not. Anyone who owns a variable rate mortgage already knows that it will suffer for a long time., but fortunately almost 70% of mortgage holders have a flat rate, which leaves most borrowers alone. Banking regulations mandate responsible credit, and in this sense, flat rate mortgages are generally more tailored transactions to keep individuals’ level of financial spending at bearable figures.
Consumer credit will become more expensive and competition will increase in this segmentobviously profitable is that an individual will be able to finance his purchase as long as he has normal solvency and is willing to pay high interest on the loan and generally a high price for what he is buying.
The main effects of the increase in rates on individuals as a whole are indirect. On the one hand, if they see inflation gradually softening, they will do so on the basis of stagnating the economy, which will translate into increased unemployment. On the other hand, financial needs of highly indebted administrations with a high propensity to spendwill keep taxes high, which will reduce the disposable income of individuals, which when added to higher prices will limit their consumption possibilities.