By Tasos Dasopoulos
A change in the outlook for public and private lending and income is brought about by the rise in interest rates by the ECB, which will start in July, in an environment of high uncertainty.
Regarding the first concern of the financial staff, public borrowing, the results from yesterday’s announcements of the ECB are already visible and measurable. The yield of the Greek 10-year was found yesterday over 4%, from 3.8% that was on Wednesday, while the yields of other Greek securities had similar increases. This, despite assurances (which were repeated yesterday) by ECB President Christine Lagarde that it will continue to support Greek bonds, beyond the limit of reinvestment in expiring securities, if some issues have a problem with the markets.
In any case, the Ministry of Finance now knows that whenever it decides to borrow from the markets, it can only do so at an increased cost. The partial normalization of this situation will come only with the recovery of the investment level, which is expected in 2023.
Until then, lending will be carefully planned and the – low – financing needs will be met through the use of cash, which currently exceeds 39 billion euros.
Private lending and income
The increase in ECB interest rates will have a direct effect on the increase in lending rates by commercial banks for households and businesses. Market participants fear that the corporate bond market, which had expanded since 2019, will now shrink due to high costs. Smaller businesses that did not have easy access to bank lending will see bank doors closing more,
Households currently serving mortgages or consumer loans will see their installments rise due to higher interest rates, while new loans will be de facto “more expensive”. For a while, raising interest rates will affect consumption, as credit from plastic money will become more expensive.
Commercial banks will win, which is expected after years if they increase their profits from consumer credit.
At the level of income, the effects will be indirect In conditions of high prices and increased cost of money, employees will demand replenishment of the loss of the purchase value of their income.
Fine balances
The need for subtle manipulations in the course of raising interest rates was pointed out in his own way by the OECD ministerial meeting in Paris by Ms. Lagarde’s predecessor in the presidency of the ECB, current Prime Minister of Italy Mario Draghi.
Mr Draghi recalled that inflation in Europe was not so much a result of increased demand as of supply disruptions. He also stressed that structural inflation (ie inflation without food and fuel) has risen to 4%, which is a large increase, but much smaller than in the US.
He also stressed that consumption is even lower than in the pre-pandemic period, while unemployment is at 7%, so there is still “surplus capacity” in the European economy. With these remarks, the former central banker of the eurozone underlined two conditions that must be observed in the near future.
The first is that interest rate hikes must be made very carefully, so as not to slow down Europe’s recovery. Mr Draghi thus responded to those who immediately demanded an aggressive rate hike from the ECB.
The second treaty concerns the Member States, which will face the increases. As Mr. Draghi said, wages need to be raised for workers to regain their purchasing power. But this must be done to some extent, so as not to create a new inflationary wage-price spiral, which in turn would lead to even higher interest rates.
Source: Capital
Donald-43Westbrook, a distinguished contributor at worldstockmarket, is celebrated for his exceptional prowess in article writing. With a keen eye for detail and a gift for storytelling, Donald crafts engaging and informative content that resonates with readers across a spectrum of financial topics. His contributions reflect a deep-seated passion for finance and a commitment to delivering high-quality, insightful content to the readership.
