January 28, 2023

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From Mortgages to the Euro, the Effects of ECB Tightening – The Economy

The new interest rate hike decided by the European Central Bank has some immediate consequences, others in the medium term and others that are difficult to predict. Among the first is the reaction of the markets, the appreciation of the euro and the rise in government bond yields with the aim of influencing investors and increasing fiscal spending.
But primarily in the medium term, the economic effects of higher rates are assessed, because monetary policy takes up to 18 months to reveal its impact.
The performance of the Frankfurt Decision Transmission Chain is also unpredictable: Banks, for example, can decide not to touch trade rates, reducing their profit margins.
* More expensive mortgage, real estate is at risk. It is one of the most direct consequences for citizens: the rate of new loans is expected to rise, which discourages new home purchases and affects the real estate market. According to the Bank of Italy, interest rates on new mortgages actually rose to 3.23% in October. The Facile.it portal calculates the increase by taking into account the 25-year mortgage of 126 thousand euros, stipulated in January 2022, with a loan of 70% (the value of the loan compared to the property covered by the guarantee). The ECB’s new interest rate increase of 50 basis points will drive variable mortgage rates higher in the coming months, with increases of around €35 ​​per month for an average loan and a burden that has risen to around €180 year-to-date (+39%).
* Loans to business decrease, and the economy is down. In an increasingly uncertain climate and with the increasing cost of money, companies will reduce their requests for financing. Which means less investment, less innovation, and less growth.
* Back to thrift. The trend is already underway due to rising inflation which is discouraging consumption. But as bank interest rates continue to rise, citizens will leave their deposited savings to earn something.
* detects the euro. It’s a textbook effect. Higher rates cause more money to flow into European banks, which strengthens the currency. Exports will cost more, and imports less, which increases ‘aggregate demand’, that is, the amount spent (by the public and individuals) to purchase national goods.
* Debt costs more. It is not a direct effect, but the increase in the discount rate also raises the value and the return that the country must pay subscribers of BOTs, BTPs, and CCTs. Government bonds that finance public debt. Yields are already adjusted, and not just at auctions. On the secondary market, BTP is now moving above the 4% threshold. How much does state coffers cost? According to estimates by the Parliamentary Budget Office (UPB), that is, by the Italian Public Accounts Authority, a fixed increase of 100 points difference increases public spending by 19 billion in three years: 2.5 billion in 2023, 6, 7 billion in 2024, 10.1 billion in 2025.

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