On Thursday, the European Central Bank raised key interest rates by 0.5 points. It’s been more than 10 years since it increased. It can have an effect on your balances, savings and prices in supermarkets. To decode this strategic shift and its consequences for your daily life, the editorial team at MoneyVox interviewed Eric Doer, Director of Economic Studies at the IESEG School of Management.
Why did the European Central Bank decide to raise key interest rates?
Eric Dor: The European Central Bank has a legal obligation to guarantee price stability in the euro area. It is part of her mandate. It has set itself the goal of maintaining inflation 2% annually.
For a long time, inflation was t minimum This goal. To stimulate economic activity, the majority of the world’s central banks have conducted Absorption of monetary policyat low interest rates.
The idea was this: If interest rates are low, businesses and households can Borrowing on concessional termsThis allows them to consume more. As a result, demand increases and inflation increases. In theory at least.
Today, the situation has changed. The return of accelerating inflation is forcing central banks raise their rates. In June, the price hike arrived 8.6% More than a year, according to the European Institute of Statistics. It goes beyond 10% in 9 countries in the eurozone.
Why did you wait so long?
Eric Dor: The question of the main modifiers is the subject of a live discussion Inside the European Central Bank. On the other hand, there are proponents of a rapid and significant rise in interest rates to curb inflation. This is the position advocated by countries such as Germany, Austria and the Netherlands.
But on the other hand, certain countries, such as Italy, Spain and France, are demanding a gradual increase in interest rates. These countries have sovereign debt He woke up. They fear that as key interest rates rise, their borrowing conditions will deteriorate.
After the sovereign debt crisis experienced by the European Union at the beginning of the 2000s, the European Central Bank has become obligated to take care of the member states’ ability to repay their debts when it makes this kind of decision.
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What is the impact of these hikes on the daily lives of the French people?
Eric Dor: The rise in the main price is a good news For savers, as all Products price It is expected to increase gradually over the next few months.
The theoretical rate of Livret A is calculated, for example every 6 months By the Banque de France of the arithmetic mean between the evolutionannual inflation Excluding tobacco over the past half year, and the STR index, which is an index based on the interest rates on short-term loans taken by banks in the eurozone.
If the ECB raises its rates, commercial banks will do so pass this increase At their own rates, STRs will increase. As a result, Livret A, which should already see its price double next July, could become more useful in 2023, as the governor of the Bank of France just announced.
He is not the only person. Long-term interest rates are already rising. The Equivalent treasury bonds (OAT) 10 years currently exchange rate 1.78%Reverse 0.23% At the beginning of 2022.
Thus, bond funds, subscribed through SICAVs, for example, will become more attractive. Likewise, life insurance contracts invested in Euro funds should eventually benefit from the increase, as they are partly invested in government bonds.
However, raising prices does not solve all problems. First, because despite the slight rise in nominal rates, savers will always lose money. The real interest rates, that is, after taking inflation into account, is currently negative. Livret A, for example, will expire soon 2%. But with inflation 6%In fact, savers perceive their purchasing power to decline by -4%.
Another downside: higher key interest rates affect savings products, but also credits, which will become more expensive. Currently, the average mortgage rate is over 20 years old 1.85%which is the highest level since 2016. This is of particular concern to first-time buyers.
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Will raising the price have a noticeable effect on prices in stores?
Eric Dor: In the current context, it is questionable whether raising interest rates can actually curb inflation. The ECB’s logic is as follows: if prices go up, Consumers will not borrow anymore to finance their expenses. Then demand will decrease mechanically, which will curb inflation.
This is true in certain situations. But the inflation we are seeing now came in 2021, with the recovery of the global economy Raw material shortageshipping disturbances and The war in Ukraine. So it is a series journey of import prices It is the cause of inflation, not a hypothetical rise in demand.
Will a rate hike by the European Central Bank enable them to get more gas, or circumvent shortages in some industrial components, such as electronic chips? Nothing less confident. To reduce inflation in this way, There must be a massive increase key rates. with prices 10% Or more, we can reduce the demand significantly, and bring it back to the level of supply. But no one would dare to do that, because he would come back cause stagnation economic.
In fact, the ECB hopes above all else that higher interest rates will have an effect psychological effect. Because high prices often depend on Self-fulfilling prophecies. If workers believe inflation will be high, they will demand wage increases to hedge against higher prices. The increase in wages which they would receive would then lead to the inflation they were expecting, because the firm, seeing that its costs were increasing, would pass it on to its prices.
By raising interest rates, the European Central Bank intends to lower inflation expectations Coined by economic agents, changing their behavior so that it is less inflated. But Nothing says it will work. This approach is still highly debated in economics.
Another important point: exchange rate. Currently, the ECB lags behind other central banks that have already raised interest rates for the most part. As a result, the value of our currency decreases: 1 euro is equal to today $1.02Reverse $1.20 previously. and this is exacerbates inflation, as products and raw materials purchased in dollars cost more in euros. In this sense, higher key interest rates will make the euro more attractive and reduce inflation.
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