Never before has Frankfurt – which has only cut or held rates steady for 11 years – decided on such an aggressive hike.
By Chrysostomos Tsoufis
Third consecutive increase in interest rates the ECB decided the 2nd in a row by 75 basis points. Somehow the key interest rate went from negative in July it has now reached 1.5% which is the highest since December 2008.
Never before has Frankfurt – which has only cut or held rates steady for 11 years – decided on such an aggressive hike.
“We’re not done yet, we have a lot of ground to cover” until inflation drops to 2%, clarified Christine Lagarde. Until when interest rates will increase and how much, the ECB will decide this from meeting to meeting and based on the data it will have at its disposal each time. And the information she currently has at her disposal is not only auspicious.
According to the ECB’s models, the growth rate in the Eurozone slowed significantly in the 3rd quarter of the year despite tourism and a further slowdown should be expected in the 4th quarter as well as in early 2023. Inflation is a breath away from double digits (9 .9% in September) and Frankfurt fears that energy and food prices that will remain higher than expected will fuel it. The economic climate may worsen further and supply chain disruptions may increase.
Bad word for borrowers
Of course, all these are in between and these are bad guesses for borrowers. It is estimated that 9 out of 10 mortgages they are linked to the Euribor interest rate which follows the course of the Central Bank interest rate.
Examples
This new increase of 0.75% means that a mortgage loan of €100,000 with an interest rate of 3.5% and a repayment period of 20 years will have a monthly installment increase from €586 to €625, i.e. a charge of €40. If we add the increase in September, also by 0.75%, then the increase in the installment is from €511 to €625, i.e. a surcharge of €114 within 2 months. If we assumed that the installment would stay there then the annual charge is €1,368. Unfortunately, as we said, more increases will come.
For an average business loan €200,000 with an interest rate of 5%, the installment increases by €84/month from €1333 to €1417 for a repayment period of 20 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. In addition, the granting of new loans will become more difficult and rare. It is characteristic that according to the figures of the Central Bank, both August and September closed with a net negative flow of new loans to individuals.
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I have worked in the news industry for over 10 years and have been an author at News Bulletin 247 for the past 5 years. I mostly cover technology news and enjoy writing about the latest gadgets and devices. I am also a huge fan of music and enjoy attending live concerts whenever possible.