The European Central Bank (ECB) has closed the year with a decision that in the long run could be a key turning point in the future of the European economy. Despite the fact that the institution chaired by Christine Lagarde decided to raise the official price of money by 0.5 points -the interest rate at which it lends to commercial banks or remunerates their deposits-, it also sent a strong and clear message to the markets: they are willing to go as far as it takes to tame inflation. Even if that means accentuating the damage to a European economy already battered by a pandemic and a war in its backyard. But, in the long run, this aggressive policy portends more expensive mortgages and accentuates the risk of recession.
After publishing the statement in which they announced their decision, Lagarde appeared before the media to make it clear that it was not a step back. They will raise rates 0.5 more points at their next meeting, another 0.5 “possibly” at the next meeting and also “possibly” later.
The ECB’s message – shared by the US Federal Reserve and the Bank of England, which have also raised rates by 0.5 points this week – is clear. Although from now on they will go slower, they will go further. In other words, that figure at which rates will finally stop rising (the peak of the mountain) is now higher. Although from now on they are going to climb it more slowly.
Official interest rates are the most powerful weapon that central banks have to combat inflation. When they rise, commercial banks find it more expensive to borrow and pass this cost on to their customers (citizens and businesses), who end up paying more interest to borrow.
Mortgages, consumer loans or loans to companies to expand their business become more expensive, which ends up slowing down economic activity. Families begin to buy less housing, employers slow down hiring and this effect ends up cascading through prices. After a while, prices end up going down, but economic growth also suffers.
This movement is having (and will undoubtedly have in the future) consequences. The clearest has been perceived in the Euribor , which has posted its biggest jump in a single day in the last four months. The reference index for most variable mortgages in Spain stood at 2.99% on Friday (16 hundredths more than on Thursday) and has already averaged 2.86% so far this month.
The Euribor is an indicator that is calculated based on the interest rates charged by commercial banks. And, therefore, it depends to a large extent on what the ECB decides. Historically, it has always remained above the ECB’s reference rate, which is already at 2.5%. If the level to which Lagarde’s want to raise rates is now higher, it is clear that the banks will end up pushing the Euribor higher. As long as the ECB fulfills its promise, something that not everyone trusts.
A higher Euribor ultimately translates into more expensive mortgage payments for families , who are already suffering a significant impact on their pockets due to the strong inflation of recent months. Financial advisers and user associations already take it for granted that 2022 will close with a Euribor of around 3%. This percentage will make the mortgage payment more expensive, which is around 50% for the most recent variable mortgages. According to the parameters used by the consumer association, Asufin, the average mortgage payment (100,000 euros with a differential of 1% over the Euribor and payable in 25 years) in December 2021 was 354 euros per month. If that loan were reviewed in December of this year, the fee would rise to 528 euros.
Lagarde’s words have also caused movements in the sovereign debt markets. In just two days, the returns required by investors to buy European public debt have skyrocketed. In Spain, the yield on the 10-year bond has gone from 2.9 to 3.3%; the German, from 1.9 to 2.2% and the Italian from 3.8 to 4.35%. This implies that when these countries need to go to the markets to finance their public spending, they will have to pay more to do so. The question is not trivial, especially if one takes into account, for example, that the Spanish Government plans to close with an annual imbalance in its accounts of 3% of GDP at least until 2025.
The ECB’s decision should also translate, in the long run, into more returns for savers. The rise in rates also affects the interest that banks pay for deposits, whose profitability was barely 0.34% on average in October, according to data from the Bank of Spain. A return up to five times lower than the eurozone average, as recently reported by El Confidencial .
Is the ECB going too far?
The direction the ECB has taken in its fight against inflation since its last meeting is leading some analysts to wonder if Lagarde is going too far. “Bad news for the eurozone’s prospects. ECB decisions, language and forecasts point to a policy (…) that will unnecessarily aggravate the coming recession ,” said Vitor Constancio, former ECB vice president, on Twitter. ING analysts also underscored in their commentary on Thursday’s decision the fact that the eurozone economy remains the hardest hit in the developed world by the energy crisis and yet has the central bank most determined to raise interest rates. .