HE European Central Bank (ECB) This Thursday faced the seventh rise in interest rates since last July, the first in 11 years. in March, ECB rose 0.5 points Despite the financial storm that broke out in the US and reached Credit Suisse in Europe, the official price of the currency remained at 3.5% (the highest level since November 2008, the beginning of the previous crisis). Analysts expect a new rise 0.25 this May and perhaps later, where it could raise the official price to a top of 4% and remain flat before cutting back at the end of this year or early next year, as most forecasts agree. point out. ECB chief Christine Lagarde admitted in April that raising interest rates had “some way to go” (she spoke of “more room to go” in March). That same Wednesday, the US Federal Reserve increased interest rates by 0.25 (in the range of 5% to 5.25%), leaving the door open for a pause in rate hikes.
1. Why is the ECB moving?
mother authority The purpose of the ECB is to CPI eurozone is located 2% in the medium term. However, current inflation is far from this target. Although inflation fell to 7% in April (the month in which it rose slightly by a tenth), so-called core inflation, excluding the more volatile energy and unprocessed food prices, remains very high. by 5.6% (decreased by one tenth in April). In March, the central bank revised its price forecasts slightly down for this year (from 6.3% to 5.3% at the average inflation rate), but raised its forecast for this year. base rate (energy and food excluded) from 4.2% to 4.6%. It also forecasts that both headline inflation (2.9% in 2024 and 2.1% in 2025) and core inflation (2.5% and 2.2%) will continue. above your target (2% in the medium term) is at the end of the projection horizon, which pushes it to make money more expensive for more cool activities.
2. Why does raising interest rates serve to fight inflation?
Increases in interest rates allow the increase in prices to cool. make financing more expensive States, companies and families, thus slowing down demand. In March, loans extended to Spanish companies decreased for the fourth time on an annual basis, decreasing by 1.2% compared to the same month of the previous year. Credit to Spanish households fell 0.5%. In particular, the amount of new mortgages fell by 1.5%.
If the aim of the European Central Bank with the interest rate hike is to reduce the loan and mortgage demand of companies and households in the euro area (as an intermediate step towards reducing demand and inflation), it seems to have achieved its purpose. , and with note. Demand for financing from companies and families is falling rapidly as banks tighten conditions for lending. up to typical levels of the 2008 global financial crisis and the euro crisis of 2011. This is expressed in the European Central Bank’s (ECB) survey of bank loans in the euro area, which corresponds to the first quarter of 2023.
3. Why are new rate hikes expected?
Like other central banks, the ECB is set to launch in 2021, when inflation starts to rise. transient phenomenon fruit reopening the economy It has decided not to raise rates after the pandemic. This occupation of Ukraine and its impact on energy prices thwarted the plans of monetary authorities. European institution begins to increase rates later than others because it came from a lower level than its counterparts and now accelerating make up for lost ground.
Still in your bosom advocating voices in recent meetings more moderate walks finally approved. The banking storm that broke out in March brought to light once again the struggle between two coexisting spirits within the ECB: those who advocate a flexible and broad interpretation of its mandates that take more account of the economic situation. (‘pigeons’) against those who advocate adhering to the goals of achieving price stability (“Hawks”). It seems certain that the euro monetary authority will increase the price of money again at this meeting. Maybut there is more doubt as to whether it will raise rates again. June as are July and to what extent.
4.What effect could it have on the economy?
despite unemployment inside the eurozone minimum (6.5% in March) and GDP manages to escape recession (0.1% growth in the first quarter), the ECB is well aware of the weak growth. In March, the ECB raised its growth forecasts for that year compared to its December forecast (1% instead of 0.5%), but lowered it for 2024 and 2025 (1% in both years compared to 1.9% and 1.8% before). ,6). ) The higher the rate hike, the greater the risk of a further slowdown.
5. What does it mean for households?
rate increases make financing more expensive attracting households, companies and States to pay their expenses expenditures and investments and withdraw the funding request. The official rates therefore act as a reference for the rest of the interest rates, such as interest rates. euriborwhich indicator most mortgages Variable rate in Spain. Euribor actually started increasing at the end of 2021. Record low of -0.505% in November 2021 In April 2023, the average rose to 3,757%. This makes mortgage payments more expensive and is expected to continue to do so in the coming months.
In addition new loans They’re also getting more expensive: the average interest on new mortgages increased from 1.35% in February 2022 to 1.35%. 2.97% in February 2023, consumer loans rose from 6.27% to 7.55%. To the extent that the ECB raises official interest rates more or less, household finance will become more or less expensive, especially since this Thursday’s increase will not be the last but a surprise.
6. And for companies and States?
Bank financing for companies has become more expensive. The average rate of new loans to companies increased. 1.35% February 2022 (For loans between 250,000 and one million Euros) to 3.93% in the same month of this year.. The rise in the official price of money, in addition to stopping the ECB from borrowing, has made securities available to both companies and States on the market more expensive for investors. In the secondary market (trading between investors), the interest required to buy 10-year Spanish bonds It has risen from 0.578% at the beginning of 2022 to over 3.40% in recent days (after reaching 3.66% at the end of December). As in the household example, the higher the ECB rates, the more expensive companies and Governments will be to finance.