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Interest rates: What the new hike means for borrowers, depositors and businesses

Interest rates: What the new hike means for borrowers, depositors and businesses
Interest rates: What the new hike means for borrowers, depositors and businesses

THE European Central Bank, at its meeting on September 8 will announce the new data, which have a direct impact on the entire economy. In order to stem the inflation plaguing the Eurozone and allow the euro to regain some of its lost ground against the dollar, the ECB is now taking a tougher line, with all that means for borrowers.

In fact, now the estimate that exists within the circles of the ECB is that the cycle of increases is expected to be completed when the basic interest rate of the euro is around 1.5%, which means that at least one more increase will follow, either at the end of 2022 or early 2023 at the latest.

Domino rise in loan rates

The upward cycle that started in July and continues has had a direct impact on the cost of borrowing for the public, businesses and households.

In absolute numbers, and if the euro interest rate reaches the level of 1.5%, the cost of borrowing for large companies and for specific projects will be at least 3.5% to 4%, while for the majority of cases it will be between 5% and 6%, taking into account the risk premium brought by the current economic situation.

This in turn translates into a new economic reality for businesses, which in previous years were used to “free money”. Thus, from now on they are asked to operate with a clearly more expensive cost of money and integrate it into their financial models, examining whether they remain viable after the adjustment. In fact, many of them have already made sure to “lock” their interest rates for the coming years on a fixed basis so that they know exactly the cost of their borrowing.

Accordingly, it remains to be seen how the bond market will shape up, both for government and banking and corporate debt. Of course, in this landscape, the tools of the ECB are expected to play a decisive role, which aim to close the “scissors” of the spread between the countries of the core and the periphery of the Eurozone. This is an extremely important bet, as an increase in the country’s borrowing costs has a direct impact on GDP, worsening the already dire situation and the goals to achieve sustainable growth in the coming years.

Already at this moment the cost of the Greek bond is above 4%, a psychological limit at which the new ECB mechanism is expected to be implemented.

The impact on bank and corporate bonds is similar, with the bar even being set above 5% for 5-year or 7-year issues. Thus, and in contrast to previous years, this particular market is “numb”, as many companies are postponing their plans to go public, waiting for the landscape to clear up and calculating what the higher cost of money means for them.

What it means for households

Big losers from the increase in interest rates are also those who have loans – mainly mortgages – with variable interest rates. In this case, the additional cost, depending on the amount and duration of the loan, can even exceed 1,500 euros per year, adding an additional burden to the already burdened budget.

Of course, it should be noted that the consequences are quite limited compared to what happened in the past, when the euro interest rate was again at a high level. And that’s because today a fairly large portion of borrowers had planned and locked their debts at a fixed interest rate – and even proportionately

low- the previous period, taking advantage of the favorable situation.
Thus, new borrowers lose out as, whether they choose a floating rate or a fixed rate, they will pay more money than they did a few months ago.

The depositors also lost

On the contrary, the benefits for depositors have so far been minimal, as the rise in interest rates is not correspondingly reflected in their returns, while at the same time the “gap” between deposit rates and inflation is greater than ever.

Thus, double-digit inflation is gnawing away at the real value of their money, while at the same time deposit rates are not going to rise above 1%, and that under conditions. This, in turn, means that savers are asked to find other solutions, such as bonds, but assuming the risk that corresponds to their choices.


The article is in Greek

Tags: Interest rates hike means borrowers depositors businesses

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