Last July 2022, the Governing Council made the decision to raise interest rates for the first time in 11 years. The European Central Bank (ECB) increased its interest rates again in September, becoming the largest increase in the history of the ECB.
The first, on July 21, 2022, was 50 basis points. The second, on September 8, of 75 basic points, up to 1.25%. The objective of raising interest rates is to curb high inflation in the eurozone, which shot up to 9.1% in August.
“Further increases are expected in the coming months,” announced the ECB. As detailed by the European body in a statement, “When prices in our economy rise too quickly, that is, when inflation is too high, raising interest rates helps us keep inflation back to our 2% target in the medium term”.
Why are interest rates going up?
With this increase, “the main reference rate stands at 1.25% and the deposit facility at 0.75%“, explained in the financial comparator Helpmycash. This increase is the second in just two months, and it is expected that they could still rise up to twice more in the remainder of 2022, specifically in October and December.
First of all, interest rates “represent the cost of a loan,” so when you request this type of financial product from an entity, “first you have to agree on an interest rate that is normally annual,” they indicate at the ECB. Thus, for example, if the bank lends you 10,000 euros at an annual interest rate of 3%, you will have to repay the amount of this loan and 300 euros per year for interest.
And the same with our savings. “For example, if you deposit 1,000 euros in your savings account at an annual rate of 2%, at the end of the year you will receive 20 euros in interest,” he stresses. The key is that these interest rates offered by banks in Spain to individuals or companies, are modified in parallel to the rates set by the ECB, in addition to being influenced by the demand and supply of credit.
“They are something like ‘the price of money’, that is, what you have to pay to borrow money. In Europe, the official interest rates are decided by the ECB, which is the institution that determines monetary policy”, they add from Helpmycash. These rates are what banks are charged for the loans they request and for the electronic money they deposit.
Interest rates increase and, consequently, the price of loans increases.
Therefore, if companies or individuals want to spend or invest, but cannot obtain credit, interest rates increase and, consequently, the price of loans increases. In the opposite situation, if citizens deposit savings in a bank, there is liquidity, and interest rates tend to be low.
How will this increase affect us?
In this sense, and given the current context, if inflation is very high because “demand exceeds the quantity of goods and services available”, the ECB can raise interest rates “so that credit is more expensive”. As a consequence, “the economy will cool down, inflation expectations will moderate and it will be reduced”, they specify in the ECB.
So how could this affect Spain? “The rise in interest rates is going to have a direct effect on the pockets of consumers, mainly those with debts”. The main cause is that, if rates rise, “borrowing is more expensive” and “paying back the money that has been borrowed in the past also It costs more if the debts have a variable interest”Helpmycash experts point out in this regard.
“It’s going to have a direct impact on people who want to buy a home.”
Those people who have a variable-rate mortgage will be the most affected for this rise, since the monthly installments will increase. “The new course of European monetary policy is also going to have a direct impact on people who want to buy a homesince, on the one hand, it will cost them more to get a mortgage and, on the other, it will be more expensive”, they add.
Secondly, People who want to sell their home can also be affected. “If mortgages are more expensive and more difficult to obtain, demand will decrease and this could cause a drop in the prices of homes for sale, in addition to the fact that it will take longer to sell the properties.”
Will it affect personal loans?
Contracting a personal loan will also be more expensive due to the increase in rates. Although, yes, the impact will be less than in mortgages. “Most likely, the interest on the loans will rise little by little and to a lesser extent,” add the experts of the comparator. Loans for consumption, such as the purchase of a car, are usually fixed, so it should not affect consumers. However, specialists recommend consumers to consult the contract to check the conditions.
Savers, that is, customers who have savings in deposits or funds, they will be the big beneficiaries of interest rate hikes. This type of increase can be translated into “a gradual and gradual improvement in the profitability of savings products,” they highlight in Helpmycash.