The ECB ends the era of low rates to curb inflation

It's 39 degrees in Frankfurt. It is extraordinarily hot in the city that houses the European Central Bank. And on the famous Zeil shopping avenue, already painted on 14th-century maps, shops continue to blow cold air at passers-by trying to protect themselves from the suffocating heat, knowing that fresh air is a luxury with an expiration date, because in any time there may be a Russian gas cut, or prices may reach heights that no business can afford. Frankfurt, like all of Germany, has been heating and cooling, for decades, thanks to well-priced Russian energy supplies. But that ends, by hook or by crook, but it ends.

This Wednesday Brussels has presented a proposal to put a mandatory cut of 15% to gas consumption throughout Europe, linearly, in the event that Russia cuts off gas, which would affect Germany above all. And this Thursday the European Central Bank will inaugurate a new era from across the street from the Bundesbank: it will raise rates for the first time in 11 years.

In principle, that figure is expected to be 0.25 points, but in recent hours information has been circulating that raises that rise to half a percentage point. In addition, the ECB is expected to detail this new instrument to ward off the ghost of the risk premium in more indebted countries, such as Italy, Greece, Spain or France. And all this, after Eurostat confirmed on Tuesday that inflation in the euro zone reached a new record in June, reaching 8.6%.

The ECB wants to burst the inflation bubble, although inflation is not just a matter of excess demand, but of a context of war in Europe and an energy crisis. But the ECB seeks with its rise a regulation from another time: raising rates cuts consumption, hinders the ability to borrow and encourages savings. But that has little to do with the flow of energy from Gazprom, for example, or with a marginal energy market that, as the president of the European Commission, Ursula von der Leyen, herself acknowledges, has ceased to make sense.

This Thursday the European Central Bank must also specify the instrument to clamp risk premiums in countries that need it, announced at an emergency meeting a month ago in Frankfurt, a mechanism to respond, although they have not given clues about its characteristics or of whether or not it will have conditionalities –as did the OMT (Outright Monetary Transactions) designed by Mario Draghi, which linked the ECB's action to resorting to the stigmatized EU anti-crisis fund called MEDE–.

This new anti-fragmentation instrument must have solid legal bases so as not to collide with the always jealous Karlsruhe court – the German Constitutional Court – while it must be flexible so that it can spend more in some jurisdictions than in others – in Spain, Italy, France and Greece, for example.

The rate hike is going to have the opposite effect for indebted households and for banks. The former will see how the interest payment on their loans rises, especially those that are mortgaged. In fact, they have been checking this situation for months since the Euribor is already at much higher levels than it was at the start of the year. This Wednesday this reference rate for loans in Europe has reached 1.164%, its highest level since 2012. A few months ago, this index was trading in negative.

For entities, however, the rate hike comes as a lever for growth after more than five years with rates below zero. The agency Moody's remarked this Wednesday in a report that "higher interest rates are going to strongly benefit interest income and overall profitability" of banks. However, he highlighted two messages that have been taking shape in the market since a rise in interest rates was predicted. The first is that the effect may be "gradual." In other words, it will not be appreciated immediately by the banks, since it will depend on the rate at which these loans are updated. The second, and more important, is that the effect "will vary between countries."

There are three countries in which a higher income for banks is expected with the rise in interest rates: Spain, Italy and Portugal. Southern Europe is the one that has been pointed out as the region in which its banks are going to benefit the most. This has been indicated this week by different analysis houses such as Moody's or Fitch, who have pointed to these banks as the most interested in the rate hike finally reaching the announcements of this Thursday's meeting.

Moody's noted that Spanish banks, along with Italian and Portuguese banks, are expected to benefit more than those in northern Europe. The main reason that this analysis house points out is that these are markets where there is a large percentage of the mortgages granted that are at a variable rate and, therefore, they will have higher income for the banks with the rise in interest rates . For the rest of Europe, however, the effect will be "gradual and moderate".

Fitch, for its part, pointed out that among these three countries, it is the Spanish banks that are going to benefit the most from the change in interest rate policy. The agency justified this analysis by pointing out that, despite the fact that Spain will not recover the pre-pandemic level of GDP until next year, this course will lead the improvement of the economy, at least in southern Europe. This "provides better business opportunities for domestic banks," he said. Fitch also argued that the demand for mortgages is being resilient in the country. Added to this is the fact that Spanish banks arrive at this situation with significant cost savings, after the thousands of layoffs and closures last year, and will have a significant increase in income.

This situation of Spanish banking is what has led the Government to point to this sector as one of those that should contribute more to public coffers, along with electricity. The Executive announced an extraordinary tax for the added benefits that the sector will have with the rise in interest rates, something in which the analysis houses agree that it will be the country with the highest revenues from this change in monetary policy. So much so that other agencies such as Standard And Poor's consider that the tax will be "manageable" and will hardly 12% of the profit of the banks.

Although the effective rate hike by the European Central Bank will not take place until this Thursday, the truth is that the effects have already been appreciating in the sector. Banks have changed their commercial policy and have returned to bet on variable mortgages after years in which the fixed ones have been a cushion against the negative rates that existed in Europe. In addition, an increase in the prices of these loans can already be seen. This Thursday, the Spanish Mortgage Association, made up of the banking system as a whole, pointed out that the average rate of mortgages signed in Spain was 1.79% in June, which is the highest level since February 2020, just before the pandemic.

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