Fiscal policy: light and shadow of the ECB interest rate hikes

Record inflation in the euro area is forcing Europe's monetary authorities to take countermeasures: the European Central Bank (ECB) is raising interest rates for the third time in a row.

Fiscal policy: light and shadow of the ECB interest rate hikes

Record inflation in the euro area is forcing Europe's monetary authorities to take countermeasures: the European Central Bank (ECB) is raising interest rates for the third time in a row. The key interest rate at which commercial banks can borrow fresh money from the ECB rose by 0.75 percentage points to 2.0 percent. Interest rate hikes are good news for savers, but they also have a downside.

What does this mean for consumers?

In view of the high inflation, people in Germany and the euro area can increasingly afford less for one euro. According to a survey by the German Savings Banks and Giro Association, 57 percent of consumers in Germany have already reduced their consumption in the past twelve months. However, even after the third interest rate hike in the euro zone, people cannot hope for a quick relaxation of prices. Europe's currency watchdogs are largely powerless against rising energy prices, which above all fuel inflation.

However, the central bank can help ensure that the inflation rate does not remain at a high level in the long term. The concern: "If citizens also expect high inflation in the long term, the unions will demand high wage increases and in some cases enforce them," explained Jörg Krämer, chief economist at Commerzbank in a guest article in the "Börsen-Zeitung". "In addition, companies can more easily push through higher prices when people expect high inflation anyway." There is a risk that wages and prices will then mutually inflate.

What does this mean for savers?

Almost all credit institutions have abolished negative interest rates on the current or overnight money account and are approaching higher interest rates on savings. "We are currently seeing a clear comeback of classic investments such as call money or time deposit accounts," reports Moritz Felde, Managing Director Financial Services at the comparison platform Check24. According to data from the consumer portal Biallo, an average of just under one percent interest is currently being paid for a one-year fixed deposit.

However, the high inflation is gnawing at the savings. "At 10 percent inflation, the real interest rate is clearly in the red. That's worse than in earlier times of negative interest rates," explains DSGV President Helmut Schleweis. The real interest rate is the interest rate on savings deposits after deducting the rate of inflation. According to FMH Finanzberatung, it will be many months, maybe even years, before the interest rates on fixed-term deposits or overnight money even come close to the inflation rate.

What does this mean for borrowers?

It has become more expensive for them to borrow fresh money. According to Check24, borrowers are currently paying an average of EUR 8.50 more per month than in January for a new installment loan of EUR 10,000 with a term of 36 months.

What does this mean for interest rates?

They are not directly dependent on ECB interest rate decisions, but are based on the interest rates on federal bonds. Even before the interest rate hikes by the central bank, building interest rates were rising. Higher interest rates hit those who need a new loan or follow-up financing for a real estate loan in particular. In the case of current mortgage loans, the interest rate does not change.

What does this mean for life insurance?

It will probably be a while before the classic old-age provision benefits from higher interest rates on the capital market. Industry experts expect that life insurers will first reduce so-called hidden burdens in the balance sheet, which arise from the interest rate turnaround, instead of increasing the profit participation. The profit participation, which insurance companies set every year depending on the economic situation and the success of their investment strategy, is an important part of the ongoing interest calculation.

What does that mean for the economy?

Central banks need to tighten monetary policy if they want to fight inflation. This takes money out of the economy, which dampens growth. The head of the Italian central bank, Ignazio Visco, recently warned that the ECB would not raise interest rates too much. "Rising inflation is now accompanied by a sudden deterioration in economic growth prospects," said Visco, who has a say in monetary policy on the Governing Council. "Against this background, rate hikes that are too rapid and significant increase the risk of a recession."

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