The shift in monetary policy benefits banks and savers, while borrowing costs become more expensive
The open bar is over. The decision of the European Central Bank (ECB) to end its debt purchases on July 1 and implement its first rate hike in 11 years that same month will have its pros and cons for different economic agents. Banks and savers will benefit from the start of monetary policy normalization, while debtors, including those with mortgages, and consumption will bear the brunt.
By raising reference interest rates, it is foreseeable that (new and extended) loans for households and businesses will also become more expensive. According to data from the Bank of Spain, household debt amounted to approximately EUR 701,500 million in April, assuming the majority of mortgage loans (517,224 million).
The simple expectation of an interest rate hike has already led to a remarkable rise in the Euribor, which has gone negative from just a few months ago to above 0.45% in early June. The effect is already noticeable with more expensive mortgages, even for those who already own them. In fact, the cost of the average mortgage revised in May skyrocketed $600 a year.
This increased financial effort to cover costs such as the mortgage could in turn negatively impact other consumer goods, one of the pillars of economic recovery. Especially in a context where wage growth has been completely decoupled from runaway inflation of 8.7% at the end of May.
The State will also have to pay more to finance itself in the market. In fact, you are already doing it. In the syndicated issuance held this week, EUR 8,000 million was placed over 10 years, with a coupon that remained at 2.55%, the highest for the reference since 2014.
In secondary markets, 10-year bond yields have also skyrocketed to 2.6%, after rising more than 6% with the ECB’s announcement. A notable difference from the 0.5% that investors demanded to buy Spanish debt at the start of the year.
It should be remembered that the transfer does not take place immediately, but rather as the old debt matures and is replaced by debt issued at new rates. In other words, Spain will continue to finance itself cheaply, but not as much as before.
Here’s the bad part. Savers will be the major beneficiaries of the rise in interest rates, after years of traversing the desert where products such as deposits or interest-bearing accounts have earned practically zero.
Banks also win by increasing their intermediation margin (difference between active and passive rates). They will earn more by making credit more expensive to offset the higher cost of reimbursing deposits.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
