The turn of the ECB encourages a slowdown in business investment

The open war that the European Central Bank (ECB) has declared against inflation risks leaving scars on a business fabric that has not yet fully recovered from the blow it received in the pandemic. In less than two months, the Frankfurt-based central bank has liquidated the heavy inheritance of 'free money' and negative rates from the Draghi era and with two consecutive increases has placed the reference rate at 1.25%. And the thing will not stop there: the president of the ECB, Christine Lagarde, announced that there will be new increases and the markets are already discounting that the rate will go to 2% or 2.25% between the remainder of this year and 2023. “We are facing a tightening of monetary policy that is not expected to stop having an impact and whose effects on the real economy are not noticed until it occurs,” says Raúl Mínguez, director of the Studies Service of the Spanish Chamber. All the analysts consulted by this newspaper agree on the transmission belt of this impact on companies and it has to do with the change in the conditions under which they are financed in the market. On the one hand, the rise in interest rates makes new financing more expensive to pay for investment projects; on the other, it raises financial burdens for debts assumed in the past, which cuts into your benefits if you have them or deepens your hole in the worst case. Related News report Yes The average mortgage will become more expensive by 200 euros per month if rates rise again at the end of the year Guillermo Ginés The Euribor is already at 2% in the daily data after the ECB increased the price of money by 0.75 this week The change in the financial environment has already begun. An analytical article published last July by the Bank of Spain admitted that so far this year there had been "a tightening of financing conditions for companies, with a rise in the cost of issuing corporate debt and a contraction in the supply of loans. The data considered by the supervisor show a collapse in the demand for credit and a worsening of the perception among SMEs of the availability of bank financing. Impact on the markets Experts predict that the rise in rates will be negative for the Stock Exchange, at least in the short term, and for listed companies Companies seem to have changed their navigation parameters towards 'crisis mode' and they have reasons for it. The latest financial stability report from the Bank of Spain warned that the rise in interest rates "would raise the net financial burden of companies relatively quickly and more intensely than in the case of households and the public sector, so that an increase of 100 basis points in short-term and long-term market interest rates (we are already at 125) would give rise, after one year, to an increase of one percentage point in the net financial burden of companies in in relation to its gross operating surplus (i.e. its profits)'. Above that range the impact would be greater. A problem for the GDP In other words, the increase in the financial burden of companies that will derive from the rise in interest rates, and that according to the Bank of Spain will begin to be perceived in all its magnitude in 2023, will eat up part profit margins of companies and will affect their inclination to invest, as warned by the director general of the Institute of Economic Studies, Gregorio Izquierdo. "Companies request credit from the bank to invest and if this is more expensive, the investment will suffer, even more so in a context of uncertainty such as the current one." The chief economist of Singular Bank, Alicia Coronil, emphasizes that this increase in financial charges is added to the added production costs of the rise in energy or raw materials, driven by the war in Ukraine. The calculations of the analysts consulted suggest that for each point that interest rates rise (they have already risen 1.25 points since July), the economy loses half a point of GDP. The analysis institutes, in fact, are revising their investment growth forecasts for this year and especially for the year to come given the expectation that the rise in rates will slow down the investment plans of companies and by extension the growth of the country. Víctor Alvargonzález, Strategy Director at Nextep Finance, predicts that the rate hike will also be negative for the Stock Exchanges, at least in the short term, and for listed companies, which could also see this financing channel restricted. According to the analysts consulted, the possibility that there are companies that reduce dividends due to their lower margins and the displacement of investors to safe-haven securities may have an influence.

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