Mortgage loan, life insurance, Livret A… What does the ECB’s rate hike change for you?

On Thursday, the European Central Bank (ECB) increased its key rates by 0.5 points. It’s been over 10 years since they stepped up. And it could have an impact on your credits, your savings and prices in supermarkets. To decipher this strategic change and its consequences on your daily life, the MoneyVox editorial team interviewed Eric Dor, director of economic studies at the IESEG School of Management.

Why did the ECB decide to raise its key rates?

Eric Dor: The ECB has a legal obligation to ensure a price stability in the euro zone. It is part of his mandate. It has set the goal of keeping inflation around 2% per year.

For a long time, inflation has t lower this purpose. And to stimulate economic activity, the majority of central banks in the world have done adjust monetary policieswith low interest rates.

The idea was as follows: if interest rates are low, companies and families can loan under favorable conditions, which allows them to consume or invest more. As a result, demand increases, and inflation increases. In theory, at least.

Today, the situation has changed. And the return of galloping inflation is straining central banks raise their taxes. In June, the price spike reached 8.6% more than 1 year, according to the European Institute of Statistics. And she overcomes 10% in 9 countries of the euro zone.

Why did you wait so long?

Eric Dor: The topic of key taxes is the subject of a animated debate within the ECB. On the one hand, there are supporters of a rapid and significant increase in interest rates to curb inflation. This is the position defended by countries such as Germany, Austria and the Netherlands.

But on the other hand, some states, such as Italy, Spain and France, are asking for a gradual increase in taxes. These countries have sovereign debt get up. And they fear that with the increase in key rates, their loan conditions will deteriorate.

After the sovereign debt crisis that the European Union went through at the beginning of the 2010s, the ECB is obliged to be concerned about the solvency of the Member States when it takes this type of decision.

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What impact will these tax increases have on the lives of the French?

Eric Dor: The key rate hike is a good news for the rescuers, since all the evaluate the products it is expected to increase gradually in the coming months.

The theoretical rate of Livret A, for example, is calculated every 6 months from the Banque de France from the arithmetic mean between inflation without tobacco during the previous semester, and the STR, a reference rate for overnight loans between banks during the same period

If the ECB raises its rates, commercial banks convey this increase on their taxes, and the STR will increase. As a result, the Livret A, which should already see its rate double next July, could become even more advantageous in 2023, as the governor of the Banque de France has just announced.

He is not alone. Long-term rates have already started to rise. U Equivalent Treasury Bonds (OAT) 10 years currently the exchange at a rate of 1.78%vs 0.23% at the beginning of the year 2022.

Bond funds, subscribed via SICAV, for example, will therefore become more attractive. Similarly, life insurance contracts invested in euro funds should eventually benefit from the increase, since they are partly invested in government securities.

That said, raising taxes doesn’t solve all problems. First, because despite a slight rise in nominal rates, savers will still lose money. U real interest rates, i.e. after taking inflation into account, are currently negative. Livret A, for example, will soon yield 2%. But with inflation 6%savers actually see their purchasing power decrease by -4%.

Another disadvantage: the increase in key rates impacts savings products, but also credits, which will become more expensive. Currently, the average rate for a mortgage over 20 years reaches 1.85%its highest level since 2016. This is particularly worrying for first-time buyers.

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Will the rate increase have a noticeable effect on prices in stores?

Eric Dor: In the current context, it is doubtful that raising interest rates can actually curb inflation. The ECB’s logic is as follows: if rates rise, consumers no longer borrow to finance their expenses. Demand will then fall mechanically, which will limit inflation.

This is true in certain situations. But the inflation we are experiencing now has arrived in 2021, with the recovery of the global economy, the shortage of raw materialsdisruptions of maritime transport and the war in ukraine. It is therefore the flight of a series of import prices that is the cause of inflation, and not a hypothetical overheating of demand.

Will the increase in ECB rates allow us to have more gas, or to avoid the shortage of certain industrial components, such as electronic chips? Nothing is less certain. To curb inflation in this way, there needs to be a massive increase the key rates. With fee 10% or more, we will be able to reduce the demand drastically, and bring it back to the supply level. But no one bothers to do it, because it will come back cause a recession economic

In reality, the ECB hopes above all that the increase in rates will have a psychological effect. Because price increases are often based self-fulfilling prophecies. If workers think inflation will be high, they will demand wage increases to cover the price increase. And the increase in wages that they will get then will cause the inflation that they expected, since the company, seeing its costs increase, will pass them on to its prices.

Raise its rates, the ECB intends lower inflation expectations formulated by economic agents, and modify their behavior so that it is less inflation. Ma nothing says it will work. And this approach remains highly debated in economics.

Last important point: the exchange rate. Currently, the ECB is lagging behind other central banks that have already raised their rates for the most part. As a result, our currency depreciates: 1 euro is worth today $1.02vs $1.20 at first. And that it exacerbates inflation, since products and raw materials purchased in dollars cost more in euros. In this sense, the increase in key rates will make the euro more attractive and limit inflation.

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