In the euro zone, it's the end of "easy" money. The European Central Bank (ECB) decided on Thursday 21 July to raise its interest rates for the first time in more than ten years, surprising with a bigger increase than expected to fight inflation and despite the Italian political crisis. Caught in a complex trade-off between rising prices and fears of recession, the Frankfurt institution opted for boldness: it raised its three key rates by 50 basis points after preparing people's minds for an increase of only 25 points.
The main interest rate thus goes from zero, the level where it has been camped since 2016, to 0.50%, while that taxing part of the bank liquidities not distributed in credit, goes up from -0.50% to zero. To calm inflation, the ECB slows consumption by making money more expensive.
Bad news for individuals, as it means borrowing will be more expensive. At the risk of seizing up the credit tap a little more. The machine works as follows: the commercial banks obtain liquidity, that is to say money, from the European Central Bank. By raising its refinancing rate, one of its three key rates, the ECB will make these liquidities pay more. By domino effect, the banks will pass on the increases to their customers. "They will gradually increase rates to return to a gain on credit", explained in L'Express Ilan Rainier, associate director of Vousfinancer last June.
Buying a house will become more complicated: the rise in real estate rates, already noticeable for several months, should continue. According to the Crédit Logement CSA observatory, property rates continued to climb in June to stand at 1.52%, against 1.39% in May. And this increase should continue until mid-July, the average rate was 1.64%, against 1.06% in December 2021. Note that rates at 2%, or beyond, could however, be considered by the end of 2022. According to Vousfinancer, the net salary necessary to borrow 300,000 euros while respecting the 35% indebtedness increases from 4086 euros to 4280 euros when the rates go from 1% to 1.50%.
In turn, the rise in ECB interest rates could demotivate people to buy and create a decline in real estate acquisitions, with the consequence of falling property prices in the years to come. However, other factors come into play: "the costs of real estate financing only partially depend on the key ECB rates and are also determined by supply and demand or the solvency of the borrower", nuance with the AFP Andreas Lipkow, analyst at Comdirect.
The rise in interest rates by the ECB is also an opportunity to relaunch the debate on the limit of the usury rate. The latter "corresponds to the maximum legal rate that credit institutions are authorized to charge when they grant you a loan", details the website of the Ministry of the Economy. With the rise in rates, some credit applications can no longer be accepted because the proposed rate would be higher than the usury rate. For example, the rate of wear is currently 2.40% for a loan over 20 years. A hike of 15 to 20 basis points is expected on July 1. For their part, companies, which have had easy access to credit in recent years, should also be affected. Banks may prefer to refuse loans to the riskiest projects.
In addition, the State will also suffer the consequences of this rise in rates. Like borrowers and businesses, states that finance themselves on the markets will find themselves on the losing side. France, for example, already indebted to the tune of more than 2,800 billion euros, will no longer benefit from borrowing rates at zero or even negative, as has been the case for years. The debt burden will thus increase, reducing the fiscal room for maneuver of governments at a time when measures to support purchasing power are costing them billions of euros.
Conversely, the rise in interest rates is good news for savers. In recent years, banks were taxed at 0.5% when they let money sleep with the ECB. One way for the latter to encourage them to inject their cash into the economy. Many establishments have passed this charge on to their customers in the form of a "custody fee" if the balance in their current accounts exceeds a certain amount. This additional cost is set to disappear. The rate cut will restore margins to banks, which should be able to offer more attractive returns on certain investments, after years of lean times. A savings product held by a majority of French people, the Livret A, for example, will see its rate double on August 1, something to delight those who are rather ants than cicadas.
