The ax fell on Thursday, September 8, with the decision of the European Central Bank (ECB) to increase its key rates by 75 basis points (0.75%). Faced with increasingly uncontrollable inflation – it is now expected to reach 8.1% in the euro zone in 2022 – the Frankfurt institution has chosen to strike hard.
But beyond the markets, which had their eyes riveted on these announcements, what will be the real impact of this decision on individuals and businesses, and more generally how is monetary policy transmitted to the real economy?
To understand this, a few theoretical reminders are necessary regarding the central banks’ mission to maintain price stability: to stem inflation, the ECB’s objective is to slow down economic activity by increasing its rates, and in the hope of thus weighing on demand. But to do this, as it is not authorized to intervene directly on the rates practiced in the real economy, it acts by lending money to commercial banks, which will themselves be led to lend it to companies or individuals.
ECB rates determine market rates
Without going into the technical details of the different rates at which the ECB lends to banks, we can say that these serve to set a ceiling and a floor, above and below which commercial banks will then be able to lend to each other (the famous interbank rate). “Within this corridor, we will find the market rates, or interbank rates (the ster or the Euribor), on which the banks rely to lend to their customers”, explains Éric Dor, director of economic studies at Iéseg.
However, this does not explain why mortgage rates in France increased well before July, the date of the first ECB hike. For months, businesses and individuals have been complaining about seeing rates rise, when it is not access to credit that is quite simply blocked.
Long rates that depend on expectations
In reality, this is explained because long-term rates depend not only on interbank rates, but also on investors’ market expectations. “To lend over a long period, you have to try to predict what the future will be like. This is why the theory is that the rates at ten or twenty years are the addition of what will be the short rates for the next few years”, deciphers Éric Dor.
Depending on the credibility granted to the central bank (will it be able to stem inflation or will it be forced to raise its rates further in the future?), an identical rate hike by the ECB or its American counterpart, the Fed, will not have the same impact on long rates.
The ECB’s dilemma
The solvency of borrowers is also likely to cause the rates charged by banks or investors to vary: because Italy is considered less solvent than Germany, it pays more for its ten-year bonds, as does a a company deemed unfit to repay its loan risks seeing its risk premiums increase.
Today, the whole question is whether, by raising its rates, the ECB is not going to put too much of a brake on the European economy, especially since, with the energy crisis, the first signs of slowdown is already being felt. Éric Dor summarizes this dilemma: “If, to solve the problem of the purchasing power of Europeans, the ECB makes them lose their jobs, then it will have lost everything. »