What do the decisions of the ECB and the statements of Kr. Lagarde

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By Leonidas Stergiou

The head of the European Central Bank, Christine Lagarde, confirmed the announcement of a 0.25% increase in interest rates in July and went one step further. Prepare the markets for the next steps: Additional rate hikes of 0.25 per unit or more if needed in September and further increases later, depending on the data coming from the inflation front.

This is a new pattern of monetary policy communication, which began in late May, when Ms. Lagad, in a post on the ECB blog, announced the end of the APP in early July (as decided today) and the first rate hike in July (as confirmed by a numerical price today).

What he achieved today

This tactic is a new monetary policy tool aimed at:

a) The market should do half the work of the ECB, by increasing the cost of money and strengthening the euro exchange rate.

Indeed, in the last few days the 3-month euribor incorporated the increase of the ECB key interest rate in July and from its level of -0.5% reached -0.3%. The increase in market interest rates is passed on to the banks’ final interest rates, acting anti-inflationary, to the extent that inflation is boosted by demand. According to the data and as stated by Mrs. Lagarde, the cost of lending to businesses and households has already increased significantly.

At the same time, the euro strengthened against the dollar, which became more apparent just hours before the ECB announced its decisions. The rise of the euro exchange rate reduces the effects of imported inflation, ie energy prices, which are the main inflation factor. Interest rate hikes from other central banks, such as the previous Fed, had weakened the euro / dollar exchange rate, amplifying inflationary pressures (cost or supply inflation).

b) It reduces the uncertainty and, consequently, the risks in the markets and the economy of the Eurozone, in order to protect the financial system and to burden the growth as little as possible from the rise in interest rates.

On the one hand, Ms. Lagarde warned of increased risks due to high inflation, war and uncertainty that can affect confidence (growth) and liquidity (increase spread, fall markets, etc.). On the other hand, he recalled the positive elements that support growth (employment, high savings, strong recovery of services and tourism, etc.). Strongly, it reassures the markets by noting that the PEPP bond purchase program does not stop repurchasing maturing bonds, boosting economies such as Greece with high public debt, by 2024. And goes two steps further: It promises gradual adjustments and maximum flexibility. open the possibility for PEPP to start making new net bond purchases again if needed. The second step involves the use of new tools that will be put into operation if necessary, ie if problems are identified in the markets that jeopardize the financing of states, companies and the financial system.

c) It limits inflation expectations in order to prevent price increases from the market and mainly high wage increases. Ms. Lagarde has stressed many times and in all ways that the ECB’s mandate is price stability and that this will be achieved. As a matter of fact, it heralds interest rate hikes, which will continue and may be higher than 0.25 basis points at a time if inflation persists.

What do the decisions mean for Greece?

An increase in interest rates means an increase in borrowing costs for businesses, households and the State. That is, more expensive loans and increase in installments for those associated with a floating interest rate.

Public debt

There is no direct impact on public debt, due to the favorable interest rate profile with long maturities. However, if lending becomes more frequent with higher interest rates, this profile will deteriorate and public debt service costs will increase.

Households and businesses

For households and businesses, the total charge from the first increase of interest rates by 0.25 of the unit is not expected to exceed 160 million euros (loan servicing). This charge doubles with a further increase of 0.25 of the unit in September. Then, each new interest rate increase mitigates the total charges, because a part goes to the deposit rates.


In terms of loans, the rise in interest rates by the ECB (or its intention) affects the 3-month euribor which is currently at -0.3%. Most loans in the Greek market are linked to the 3-month euribor (almost 95%). Many of them, the final interest rate does not take into account negative euribor prices, so there will be no change in installments until it reaches zero. This may be done by September.

In addition, the majority of loans in Greece are interest-bearing. This means that the older it is, the smaller the interest rate is repaid. So, the consequence of rising interest rates will be less. It will be bigger in the new loans.

In fixed interest rate loans, the effect is on new loans, as the new fixed interest rates will be higher. Fixed interest rates are affected by the yield curves on bonds, where increases have reached European levels of 1.5-2 percentage points.


Market rate hikes are first passed on loan interest rates, almost half, over a period of one month. The adjustment of fixed interest rates on loans is more immediate, unless the banks absorb part of the cost for competition reasons.

On deposits, interest rate hikes are lower and pass to the saver after the ECB decides to raise more than 50 basis points. Increases in deposit rates are faster and to a greater extent over long maturities, while short-term ones are slower, e.g. in sight deposits. This is because short-term liquidity is high due to bond purchase programs, support packages and increased deposits. Moreover, euribor in the shorter term, such as 1 month or 1 week, remains below -0.5% of the ECB.

Cost of money

Banks estimate that this liquidity may take a year and a half to be absorbed. But when that happens, euribor will follow the ECB’s deposit rate, which is currently at 0%. Following the July and September increases, this interest rate will be higher, so a sharp adjustment of the euribor is expected. This adjustment will also affect interest rates on loans, especially those related to 1-month euribor.

Growth, employment

Rising interest rates are having a negative effect on growth, as they make investment financing more expensive. This in turn negatively affects employment and consumption. Thus, demand and inflation are reduced.

However, part of the negative impact on the growth of the Greek economy has already appeared from inflation (increase in production costs, decrease in disposable income). At the same time, the Greek economy expects significant revenues from the tourism recovery and significant investments through the Recovery Fund.


On the other hand, rising interest rates that could boost the euro exchange rate could make Greek exports less competitive.

Red loans, bad debts

Inflation has reduced, on an annual basis, the disposable income of borrowers by 8% -9%. Banks estimate that a 20% reduction in disposable income could lead to new red loans of up to 300-400m euros. There are estimates for higher amounts, as loans of about 9 billion euros (including those serviced) are supported directly or indirectly with some kind of state or banking support, according to BoG data.

Source: Capital

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