In the summer, the European Central Bank will raise interest rates for the first time in a decade. Many people put their hope in this step. He promises to contain the inflation of recent months. But the increase will have a downside for many Germans.
Shopping in the supermarket is becoming more expensive every week. The reason is inflation. In Germany it is currently 7.9 percent, actually it should be around two percent. The calls for regulation have been getting louder and louder since the beginning of the year.
But in the eurozone, only one body can fight inflation effectively: the European Central Bank. It is tasked with keeping price increases in check across the eurozone. And that’s not easy at all.
After a long hesitation, ECB President Christine Lagarde announced a 0.25 percentage point increase in the key interest rate last week. A further increase in September is almost certain and should inflation not be slowed down in a timely manner, further interest rate hikes could follow this year.
The ECB is now announcing much faster steps than previously assumed – and that can also be dangerous. So what impact does a rate hike have?
The interest rate hike is intended to curb price increases quickly. But that won’t be that easy. The reason: The main driver for the overall inflation are energy prices – and the European Central Bank has little influence on them. Nevertheless, the interest rate step is important for the prices of the remaining products in the shopping basket. It is also important to prevent a wage-price spiral in which the increased prices of everyday life lead to high wage demands, which in turn lead to even higher prices.
In recent years, it has never been cheaper for home builders to take out a home loan. That will change as soon as the key interest rate rises – there have already been increases since last year. While the average interest rate on mortgage lending over 15 years was 1.31 percent in June 2021, it rose to over three percent in May, according to the real estate financier Interhyp. A home loan is therefore as expensive as it was last in 2014. All homeowners who have only relied on short-term financing over ten or 15 years in the past decade must be prepared for significantly more expensive follow-up financing.
But not only her. Consumer and overdraft facilities are also becoming more expensive. In short: Wherever you could borrow money cheaply in the past, it will soon become more expensive.
Savers can rejoice. As soon as negative interest rates for bank deposits at the ECB rise above zero, bank savings rates are likely to rise again. ECB boss Lagarde announced this step for the third quarter of 2022. But be careful: interest rates will not immediately rise to a level that allows you to beat inflation with a call money account. Alternative forms of investment such as ETFs or funds remain relevant for savers. Bank accounts could also become cheaper again if the banks no longer have to pass on the previous negative interest rates to customers.
What makes savers happy is more of a bitter pill for investors. For years there was no alternative to investing in the stock market to build up wealth. Demand was huge, prices rose and rose. With increasingly attractive offers apart from stocks and ETFs, the prices here will not rise as quickly as they did recently. On the other hand, cautious investors in particular, who were previously too suspicious of equities, now have better prospects of good returns, for example on government bonds.
If you want to create an ETF (Exchange Trade Fund) as a savings plan, you have to open the right securities account. Compare Germany’s online banks and neo-brokers by offer, price and service for your ETF savings plan.
Rising interest rates could also get some countries into trouble. It should soon become apparent which countries have borrowed money with long-term bonds and thus secured the favorable interest rates. Anyone who, like many home builders, has opted for short-term maturities could soon slip into refinancing problems – one of the reasons why some small euro countries in particular only recently agreed to an increase in key interest rates. So far they have been able to borrow money cheaply and thus put their state finances in order. It won’t be that cheap anymore.
