The effects brought by the increase in interest rates by the ECB

of Chrysosotmos Tsoufis

Unprecedented situations require unprecedented measures and the ECB resorted to such.

With inflation rising month by month in the Eurozone, Christine Lagarde announced a 75 basis point increase in the central bank’s key interest rate to 1.25%.

Never before had Frankfurt, which for 11 years had only cut or held interest rates, decided on such an aggressive hike. (For history buffs in January 1999 the ECB had raised interest rates by 75 basis points when the euro was in its infancy).

Europe has officially entered the period of interest rate hikes, as Christine Lagarde said in her statements that more hikes will be needed for the ECB to achieve the drop in inflation to 2%, and these are bad predictions for borrowers. It is estimated that 9 out of 10 mortgages are linked to the Euribor rate which follows the course of the Central Bank rate.

The 0.75% increase is expected to increase the installment of an average €100,000 mortgage by €37/month for a 15-year repayment term or €39/month for a 20-year repayment term.

For an average business loan of €200,000 with an interest rate of 5.5%, the installment increases by €76/month for a repayment period of 10 years.

At the moment, there are no fears expressed about the course of non-performing loans, but given the time and given other interest rate increases, it is reasonable that the risk will increase.

Regarding deposits, the banks in their announcements state that they will pass on about half of the increase in interest rates. This means reducing the benefits for depositors who are already seeing the value of their money being…nibbled away by inflation.

However, interest rate hikes will slowly start to lower inflation, improving the burdens that households and businesses need to bear. At the same time, they will also strengthen the euro – which has already recovered above 1 to 1 with the dollar – making shopping and travel outside the euro zone more affordable.

On the other hand, the prospects for growth are darkening. According to most analysts, Europe is the frontrunner to enter recession and interest rate hikes are providing the last slight push. Frankfurt, however, in its basic scenario talks about stagnation of the economy, the forecast is for 0.9% growth in 2023. The unfavorable scenario, however, foresees a recession and according to Christine Lagarde, it is very dark…

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