ECB rate hike: what consequences for borrowers?

In the euro zone, it is the end of “easy” money. On Thursday 21 July the European Central Bank (ECB) decided to raise interest rates for the first time in more than ten years, surprising with a larger than expected increase to fight inflation and despite the Italian political crisis. Caught in a complex trade-off between rising prices and recession fears, the Frankfurt institution opted for audacity: it raised its three key rates by 50 basis points after preparing people’s minds for a hike of just 25 basis points. points.

The main interest rate thus passes from zero, the level at which it has been established since 2016, to 0.50%, while that by taxing part of the bank liquidity not distributed on credit, rises from -0.50% to zero. To calm inflation, the ECB slows consumption by making money more expensive.

Bad news for individuals, as it means borrowing will be more expensive. At the risk of taking over credit, it touches a little more. The machine works like this: commercial banks obtain liquidity, that is, money, from the European Central Bank. By increasing its refinancing rate, one of its three key rates, the ECB will charge more for this liquidity. As a domino effect, banks will pass the increases on to their customers: “they will gradually raise rates to return to a credit gain,” Ilan Rainier, associate director of Vousfinancer, told L’Express last June.

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Borrowers can be discouraged from buying

Buying a home will become more complicated: the rise in real estate rates, already noticeable for several months, should continue. According to the CSA Crédit Logement Observatory, real estate rates continued to rise in June, reaching 1.52%, against 1.39% in May. And this increase is expected to continue until mid-July, the average rate was 1.64%, up from 1.06% in December 2021. Note that rates at 2% or more could still be considered. by the end of 2022. According to Vousfinancer, the net salary needed to borrow € 300,000 while respecting the debt of 35% goes from € 4086 to € 4280 when rates go from 1% to 1.50%.

In turn, the ECB’s rising interest rates could demotivate people to buy and create a decline in property acquisitions, resulting in falling property prices in the years to come. However, other factors come into play. Comdirect.

The ECB’s rate hike is also an opportunity to relaunch the debate on the usury rate limit. The latter “corresponds to the maximum legal rate that credit institutions are authorized to apply when they grant you a loan”, specifies the website of the Ministry of Economy. With the increase in rates, some credit applications can no longer be accepted because the proposed rate would be higher than the usury rate. For example, the usury rate is currently 2.40% for a loan over 20 years. An increase of 15-20 basis points is expected for 1 July. For their part, businesses should also be affected, which in recent years have had easy access to credit. Banks may prefer to turn down loans to riskier projects.

The state among the losers

Furthermore, the state will also suffer the consequences of this rate hike. Like borrowers and businesses, states that finance themselves on the markets will find themselves on the losing side. France, for example, already indebted for over € 2,800 billion, will no longer benefit from zero or even negative borrowing rates, as has been the case for years. The debt burden will thus increase, reducing governments’ fiscal room for maneuver at a time when support measures for purchasing power has cost them billions of euros.

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Conversely, rising interest rates are good news for savers. In recent years, banks have been taxed at 0.5% when they let money sleep with the ECB. One way for the latter to encourage them to inject their money into the economy. Many businesses have passed this charge on to their customers in the form of “custodial fees” if their checking account balance exceeds a certain amount. This additional cost is bound to disappear. The rate cut will restore margins to banks, which should be able to offer more attractive returns on certain investments after lean years. A savings product held by a majority of French people, the Livret A, for example, will see its rate double on August 1, something to delight those who are more ants than cicadas.


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