The ECB prepares for a new historical rise in interest rates

The ECB prepares for a new historical rise in interest rates

Less than half a year ago, Christine Lagarde kept repeating that inflation was not a problem and ruled out rate hikes on the horizon. Today not only has the first of the increases been made, in July, but the market expects a second increase of 0.75 percentage points at the meeting that the Council of the European Central Bank (ECB) will hold this Thursday in Frankfurt.

Several members of the council have been publicly in favor of this high-impact rise, including some of those considered 'doves' because they tend to be in favor of more lax monetary policies. It is not for less, taking into account that inflation in the euro area is at 9.1%. Nobody disputes, moreover, that they are coming double digit inflation rates and new record highs during the fall.

From these data the experts deduce the rise of 0.75 points. Before each decision on interest rates of the ECB, the Reuters agency surveys 61 economists about their prospects and 30 of them assume this time that this will be the size of the rise. Only 27 have an increase of 0.5 percentage points and four foresee 0.25. Some voices have even been heard that predict a rate increase of a full percentage point. However, this is considered unlikely because the central bank usually prepares markets for rate hikes in order to avoid backlash and there are no signs of this.

The president of the Bundesbank, surely the most recognizable of the 'hawks' of the ECB, Joachim Nagel, has suggested a rise with continuation in the coming months. "We need a strong interest rate hike in September and more rate increases in the coming months," he said, while Austrian Robert Holzmann called a 0.5% increase "minimal."

The 'hawks' of the ECB

“We need a strong interest rate hike in September and more rate hikes in the coming months”

Joachim Nagel

President of the Bundesbank

According to Deutsche Bank Research, financial markets have already priced in a 0.75 percentage point rate hike and expect two more hikes of 0.5 points each, in October and December, until the end of the year. Thus, at the end of 2022, the key interest rate for refinancing would be 2.25%. Ebury, the global 'fintech' specializing in international payments, considers that any rise of less than 75 points will be considered "a major disappointment for the markets" and "would most likely trigger a sharp and immediate fall in the euro."

The common currency's reaction to the expected 75 basis point hike will depend on several factors, including the bank's assessment of growth prospects, its updated projections on inflation and its guidance, or lack thereof, on future policy measures. . “If the bank were to warn of the possibility of a deep recession, while indicating that it could raise rates at a slower pace than markets expect, the euro would fall. On the contrary, a slightly less pessimistic evaluation, combined with a rhetoric that leaves the door open to another big rate hike in October, will probably have a bullish effect for the euro", they calculate, although they warn that, in the context of the serious situation of European energy markets, it may be difficult for the euro to post significant gains against the dollar after the meeting.

Mortgages, 1,400 euros more expensive

For now, and based on these expectations, The Euribor closed August at 1.249%, which already means an increase in the average variable mortgage in Spain of 1,433 euros per year, 120 euros per month. We are talking about a mortgage of 150,000 euros with a term of 25 years and contracted at an interest rate of Euribor plus a differential of 90 basic points, for which the monthly installment will go from 525.5 euros per month to 644.90 after the update.

In addition, new credits also become more expensive: the average interest on new mortgages has gone from 1.38% at the end of last year to 1.8%, while that of consumer loans has risen from 6.1% to 6.82%.

Bank financing for companies is not far behind. The average rate of new business loans has risen from 1.24% in December to 1.67% and the Spanish Treasury, for example, has issued this Tuesday 4,650.51 million euros in letters at six and 12 months, with a rate of 0.880% in the first case (in the August auction it was 0.465% and in December it was -0.662%) and 1.423% in the second (compared to 0.795% before and -0.595% in December). In the secondary market (purchases and sales between investors), the interest required to acquire 10-year Spanish bonds has gone from 0.578% at the beginning of the year to around 2.8%. And this is just the beginning, Commerzbank chief economist Jörg Krämer even considers an interest rate level above 4% appropriate at the end of the year. Although we cannot count on the increase causing an automatic effect of controlling inflation.

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