The ECB has raised interest rates again to 4-4,25%: who wins and who loses with this increase? Who earns more and who less?
The ECB rates reach 4.25% with the July decision: who loses and who wins with a further increase in interest rates?
With inflation still cooling down and core price pressures that have not eased satisfactorily, the ECB wanted to give another proof of its determination to hit the 2% target.
What are the consequences with a ECB interest rate now at 4.25%? Let’s see who wins and who loses in the rising financing costs.
Who wins with the ECB rate hike
When we talk about interest rates we essentially refer to the cost of borrowing money. In other words, if a consumer or a business wants to obtain liquidity through a loan, the interest rate to be paid to the lender (in this case a credit institution) goes up, making it less convenient.
This is precisely the purpose of the ECB: to cool the demand for liquidity, investments, and consumption in order to cool inflation.
The premise helps us to understand why, in the mechanism of rate hikes, winners and losers can be identified. Who profits from a higher cost of money?
Banks
One of the effects of higher interest rates is that banks, by applying a higher cost of borrowing money, earn more.
Technically speaking, this means their interest margins increase, benefiting their balance sheets. It is no coincidence that the profits of Italian banks in the first quarter of 2023 reached new records, also helped by the ECB policy of higher rates which offers growing interest income.
Specifically for banks, interest income, which it collects from customers and which is influenced by ECB rates, is greater than interest expense, which it pays to customers.
Savers
Since it is more expensive to borrow to spend cash, it becomes more profitable to save.
With higher interest rates, in essence, those who have money on deposit accounts can expect a greater return, since, as explained by the ECB itself: “interest is the amount that your savings earn, i.e. the return you receive when the bank "borrows money" from you."
But be careful: the increase in the deposit rate is not going hand in hand with the interest rate increase in banking decisions, thus eroding savings already affected by inflation. This was recalled by Fabi, the Autonomous Italian Banking Federation.
Who loses with ECB rates at 4.25%
With the high cost of money, there are various sectors and financial and economic categories that face disadvantages. Who loses when ECB interest rates rise, as is happening now?
Private individuals with mortgage
The first factor that weighs on private citizens with the increase in the cost of money is the increase in mortgage payments, especially at a variable rate.
This happens because Euribor, from which the interest rate of a variable mortgage is calculated, is linked to the ECB’s monetary policy, in the sense that it increases with a rise in interest rates by the central bank. The central bank intervenes by increasing its reference rate and this also increases the value that European banks have to pay when they borrow money from the ECB. As a result, banks will also increase the cost of loans and mortgages for citizens and businesses.
Codacons estimates that the rise in interest rates by 25 basis points will result in an average increase of 20 euros per installment for Italian families with a variable-rate mortgage.
As explained in one of our articles, according to the Federconsumatori National Observatory, the installment for a mortgage of 115,000 euros over 25 years has increased by 212.43 euros per month and 2,549.16 euros per year in the last year. We are talking about an increase of 44% compared to 2022 and even 64% compared to 2021.
Citizen consumers
Even without a mortgage, the average consumer is still negatively affected by rising rates. This is because the cost of borrowing money from the bank is increasing at a time when family budgets are getting increasingly affected by high inflation.
Still high prices of basic necessities erode purchasing power, while the ECB makes it more difficult to borrow liquidity that would be necessary to meet expenses.
State
The monetary policy of rising rates usually results in a rise in bond yields, with a consequent fall in its price. Now, the surge in the Btp yield means that state debt costs more.
The Public Accounts Observatory has carried out a study in this regard: with a 1 percentage point increase in interest rates on government bonds, persistent and uniform along the curve by maturities, interest expenditure can grow by 3 billion in the next 12 months (and 39.4 billion in the following 5 years).
This greater burden on state coffers adds to a not-rosy period, given that public spending has been pressed by aid to help families and businesses with expensive bills.
Companies
For companies obtaining loans will be more difficult and prohibitive with ECB interest rates rising with each meeting. Companies wishing to invest by asking for financing often have to pay higher charges to the banks and are therefore often forced to slow down.
Furthermore, companies that already have debt now have to pay higher installments, with repercussions on balance sheets and risks of insolvencies.
Finally, pay attention to the movements of the euro. Generally, aggressive monetary policy pushes the single currency against the dollar. With the appreciation of the euro, exports are more advantageous, but not imports, which usually concern raw materials (which risk increasing in price even more with an unfavorable exchange rate).
Original article published on Money.it Italy 2023-07-27 16:06:00. Original title: Chi vince e chi perde con tassi Bce al 4,25%
