After 11 years, the interest rate in the eurozone increases by 0.25% in July. Possible new increase in September. Rise in eurozone bond yields.
End of season by the European Central Bank (ECB): After 11 years of “cheap money” interest rates will increase by 0.25% from July, as announced on Thursday by the Bank’s Board of Directors after its meeting on monetary policy issues in Amsterdam. In this way, the depositors of the single European currency are trying to raise the bar in the continuous rise of inflation, which, according to the data of May, now reaches 8.1% in the euro area on an annual basis, compared to 7.4% in April.
In a statement issued on Thursday, the ECB left open the possibility of another interest rate hike from September, which may even be more than 0.25%. It seems that the Bank of Frankfurt will wait to evaluate further data on economic growth and the labor market in the euro area, before making more radical decisions. At the same time, the ECB announced on Thursday that it is ending its interventions under the extraordinary asset purchase program (APP) from 1 July.
“The ECB is lagging behind”
In Germany, however, most analysts estimate that the ECB it is already too late to take effective action to tame inflation. “Monetary policy risks are increasing unjustifiably with the ECB’s decision not to raise interest rates immediately, but to postpone the increase for the next few months,” Stephen Coates, a spokesman for the Kiel Institute for World Economy, told Reuters. add that “the steps announced were a necessary start, but nothing more. “Further steps must be taken to normalize monetary policy, because the bank’s credibility is now at stake.”
According to Jürgen Kremer, chief economist at Commerzbank, “the ECB is in danger of consolidating inflationary expectations with its reluctant tactics. To avoid this, it will have to raise interest rates by 0.5% at its next meeting in July at the latest. “Small increases of 0.25% can not tame inflation.” “The ECB’s tactics remain extremely hesitant,” said Christian Ossing, president of the Association of German Banks. On the other hand, the analyst of the economic review Handelsblatt, Jan Malien, estimates that “with today’s decision, the ECB goes one step further than expected. Most experts were expecting the end of the bond market and an interest rate hike in July anyway. The announcement for a further and even bigger increase in September is probably a surprise “.
Concerns for Greece and other Mediterranean countries
Following the ECB announcement, government bond yields in the euro area began to rise significantly. For the Spanish, but also for the German ten-year bond, the yields reached the highest levels of the last eight years (2.62% and 1.47% respectively). The yield on the Italian bond exceeded 3.6%, while the Greek ten-year bond jumped to 4.1%.
On the website of Tagesschau.de, the first channel of German television (ARD) points out that “with the rise in interest rates, borrowing becomes more expensive, especially for the state budgets of heavily indebted countries, such as Greece and Italy”. Germany is concerned about the additional financial burden on mortgage borrowers, depending of course on the agreement they have made (fixed or floating interest rate). The burden will be particularly strong for those who have received consumer loans. Their number in Germany is estimated at six million debtors.
DW – Giannis Papadimitriou
