– The ECB has raised the base interest rates, but there are still predictions that this may not be the last increase. How does this affect residents and businesses?
– This shows that inflation in the euro zone has reached record highs – 9.1 percent. This is the highest level in its entire history, there has not been such high inflation in this entire century. This shows that the ECB is willing to stop it even at the risk of slowing the economy at the same time, because raising interest rates harms both consumers and businesses – interest rates are relevant for everyone.
This kind of policy is trying to say: slow down consumption and borrowing because it will cost more, and that’s how we want to control inflation.
– Which sectors will be most affected?
– As for residents – for everyone who has a loan. Exclusively – housing loans, because these are both long-term relationships and the amounts are large. Consumer loans will also be more expensive, but since the amounts are different, the impact will not be so great.
The current base interest rate is 1.25 percent. EURIBOR, which is already paid by the end user, has risen to 1.4% since the beginning of the year, after being practically zero at the beginning of the year. Hence, 100 thousand A person who borrows EUR 1.4 thousand will pay an additional 1.4 thousand per year. euros. It will be more than 100 euros per month.
As for the sectors, the most sensitive ones will be affected, those who do not have money, sectors affected by the pandemic, such as hotels, restaurants. But they are also joined by representatives of heavy industry: fertilizer manufacturers and the like, who have already stopped their activities or are thinking of doing so. It must be understood that when a company stops its operations, it does not receive income, and the loans it inevitably has become more expensive.
– The ECB raises interest rates gradually. Can it be said that this path was chosen because of the lessons of former central banks?
– It is gradually raised, because the goal is to balance the two sides. We have 9 percent. inflation – as if we could say that we are cutting 9%. interest and inflation will stop immediately. That would happen, but households would not be able to repay their loans, the pressure on real estate would be enormous, prices would fall, consumers would not consume, businesses would close because they would have nothing to sell. It would be a knock-on effect that solves inflation, but there is no life left either.
The ECB raises interest rates by 0.25%, most recently by 0.75%. and observes for a month how the market reacts: whether inflation recedes or the economy starts to collapse. That’s how you try to balance.
– It is said that this also shows the desire of the ECB to return to 2% in the medium term. target inflation rate. Is that possible?
– I have no doubt that in the long run it will return to 2 percent. or 2.5 percent level that is tolerated by the World Bank. Even during the last crisis, he stated that this is a sign of a sustainable economy: money depreciates a little, which encourages consumption, but does not depreciate so much as to promote unstable situations.
It’s just a question of how high interest rates will have to go and how long they will stay there before we get back to that point. Historically, interest rates in the Eurozone have been around 5% twice this century. We shouldn’t be surprised if we get close to that level next year.
A side effect is also possible: it is possible that the world’s energy problems will be solved during this winter. After normalization of the market, the price of energy resources will start to decrease. This means that the excess price pressure that exists now will be removed.
Our economy would function well enough if it weren’t for the high prices of gas and electricity. This is the main driver of inflation. The ECB’s efforts and the properly structured raw materials market can allow us to hope that the situation will improve in the future.
– How much more can interest rates increase?
– When I think about Europe, I always look at the USA – usually a lot of things start and end there. The US central bank is acting much more aggressively and raising interest rates much higher. They have already reached 2.5 percent. level. It is predicted that it may reach even 4.2 percent at the end of this year. Generally, Europe and much of the rest of the world behaves similarly, with only a 6-8 month delay.
– Judging by the increase in interest rates, which was announced back in the summer, what real impact has it already had on businesses and residents?
– It has already done and is getting bigger because EURIBOR, the interbank interest rate that we pay, reacts to changes in EURIBOR, and at the same time reacts even before those changes occur: EURIBOR moves before the ECB’s decision is announced. As I mentioned, EURIBOR reached 1.4%, it is likely to exceed 2% by the end of the year, as market players are predicting it.
Loans have already become more expensive by almost 1.5 percent: from 100 thousand. euros – one thousand euros per year. If EURIBOR rises to 2% and at that time the interest will be recalculated for you, which is usually done every six months, from that day the loan will cost an additional 2 thousand. euros.
The same applies to businesses, only here the amounts are much higher.
– Do you need to be afraid of loans right now?
– Overall, you should not be afraid of loans, because the Bank of Lithuania had introduced a restriction that a person’s ability to repay a loan should be calculated with 5%. with interest. Thus, central banks were obliged to “throw” theoretical interest rates and check whether a person can function in such an environment. So, theoretically, we are ready for higher interest rates.
The bad thing is that some businesses will stop during this winter due to high energy prices and high money prices and some people will go to idle time or be laid off. And when you lose income, low or high interest, it hurts.
But the costs for people will increase not only from interest – we should be ready to pay several tens to a couple of hundred euros per month for energy resources. But having a job and making money, I think it’s not a tragedy – it’s a period we have to go through.
– Some businessmen mention that this period can hit harder than a pandemic that has been going on for several years. Can we compare these situations?
– When assessing the consequences of the pandemic, its impact on business was not as great as could be expected, except for a few sectors: catering, entertainment, accommodation suffered.
The current situation affects all sectors without exception, including those that did not have time to recover from the pandemic. Therefore, the potential risk for Lithuanian business, looking at today’s realities, is greater.
– Is saving in these cases the only way that can help?
– Savings are always necessary. But the best security element is high income. Being able to increase our income is a much better thing, because we can save up to 100%. If we try to increase our income and reduce our expenses in various ways, it would be the most effective way to feel more comfortable in such situations.