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ECB raises interest rates – how it affects our lives

ECB raises interest rates – how it affects our lives
Written by insideindyhomes

Too little, too late: Many experts have criticized the interest rate hike by the European Central Bank (ECB). Inflation is more than eight percent (May), the key interest rate is now expected to rise from zero to 0.25 percent in July. What impact does this have on different areas of life?

Business: Economic expert Clemens Fuest from the Ifo Institute gives a pessimistic outlook: “Monetary policy is too late, there is no doubt about that,” he explained. In order to combat inflation, the ECB must take further interest rate hikes, which have already been announced. But that puts an additional strain on the economy. He therefore expects the euro area to slip into recession.

Consumer credit is only now becoming more expensive

Private Loans: Long-term loans will become more expensive. This mainly affects “house builders” with their mortgages. However, the market has already partially anticipated the current rate hike. Since the beginning of the year, ten-year loans have become massively more expensive. While the annual interest rate was around one percent in January, it is now three percent. Short-term credit, which is often used for consumption, may now start to become more expensive. They are based particularly closely on the key interest rates.

Save up: The debtor’s sorrow, the saver’s joy – one might think. In fact, some of the banks’ conditions for overnight and time deposits are already improving. However, the level is (still) so low that you will hardly notice the difference at first. The ECB has indicated that it wants to abolish penalty interest on deposits. As a result, the commercial banks could also follow suit and abolish the “custody fees” for larger sums. While that would be good news, the problem of high inflation remains for now. Professionals advise to refrain from long fixed interest rates at the moment. Interest rates will continue to rise in the near future.

Employers could get off cheaper

Prices: The prices for food or energy, for example, are determined by a wide variety of factors. The ECB hopes that with the steps it has taken (a further rise in interest rates is to follow in the autumn), inflation will be reduced to 3.5 percent in 2023 and then to 2.1 percent in 2024. Whether that works: open.

Wages: The ECB decision is also likely to have an impact on upcoming and ongoing collective bargaining rounds. The trade unions justify their demands quite conclusively with the fact that the workers need inflation compensation. If – as the central bankers intend – inflation falls again in the coming years, this would give employers arguments to hand. You would get off cheaper. This should apply to both collectively agreed and individual wage demands. IG Metall, the country’s leading trade union, called on Friday for a wage increase of seven percent for the next two years – “or more,” explained its boss Jörg Hofmann.

It will be difficult for countries with poor credit ratings

Public finances: Experts fear a return of the euro crisis. Reason: The ECB has announced that it will stop buying up government bonds. This means that states are paying more interest on their debts again. And highly indebted countries, whose creditworthiness is rated rather poorly, will pay a particularly high proportion.

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Similar to lending rates, this development has already been partially anticipated: while Germany was still able to charge fees last year, Finance Minister Christian Lindner (FDP) now has to pay 1.5 percent interest if he borrows money on the capital market for ten years want to borrow. His Italian counterpart 3.5 percent. As a result, governments will find it more difficult to simply solve political or social problems with “cheap money”.

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