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Thursday, May 26, 2022
HomeLatest NewsHow interest rates will affect us: from paying debts to banking business

How interest rates will affect us: from paying debts to banking business

The US Federal Reserve (Fed) justified market expectations and raised interest rates again this week to 0.5%. If the European Central Bank (ECB) follows the path started by the Bank of England and then the Fed, it is only a matter of time. The ECB president has assured the European institution’s strategy will be “more gradual” than that of the US, and she said some analysts are suggesting a rate hike in July. Eurozone inflation is already at 7.5% y/y so far, below Spain’s consumer price index (CPI) of 8.4% in April, according to preliminary data. The change in monetary policy has among its goals contain pricesbut it will also have other implications that range from issuance and interest on Spanish debt to the banking business.

Public debt reached during the pandemic will not return to previous levels or within seven years, according to International Monetary Fund (IMF) forecasts. According to government estimates, this year it will amount to 115.2% of GDP, in 2023 – 112.4%; 110.9% in 2024 and will decrease to 109.7% in 2025. Debt that the government will have to face in a scenario in which funding is more expensive and emergency debt buyouts due to the pandemic have already been completed. However, Vice President of Economic Affairs Nadia Calvinho assured this week that Spain has taken advantage of the negative rate scenario in recent years and more ECB buying “improve conditions for financing the public sector.”

In the Stability Program sent to the European Commission, the Government expects interest payments to be 2.2% of GDP this year and next, and will be reduced to 2.1% in 2024 and 2025. That is, Moncloa rules out that rising interest rates imply disproportionate increase in interest payments on debt. “We have public debt with a maturity of more than eight years, a very long term. We have the cost of interest rates, which we have refinanced with very low interest rates, and this gives us the opportunity to cope well with this progressive increase in interest rates by the European Central Bank,” Calvinho recalled.

María Jesús Fernández, senior economist at Funcas’ economics department, notes, however, that “so far, the interest payments on the debt have been reduced, but now they will increase.” “Rising rates will lead to an increase in the amount of debt,” he explains. These payments could reach €27.9bn this year, up from €26bn in 2021, according to Funcas’ calculations. “In 2022, the impact will not be very high, but it will increase over the years,” he insists. Victor Alvargonzalez, analyst and founding partner at Nextep Finance, agrees. “This increase is not a problem for the state for another 20 years, it is a problem for our children,” he describes. “At least it will rise by one percentage point to cope with inflation,” he calculates. This is Debt will become more expensive if financing conditions tightensomething derived from rising interest rates, but that won’t happen much in the short term.

Moreover, the decision to The ECB rate hike will affect the banking business. “It will be a relief for the banks, because they will again have margins, which have now been reduced. Now the ECB has instructed them to hold deposits, and this has affected their profitability,” Fernandez describes. In recent results presentations, Ibex 35 banks were wary of the impact of the rate hike on their accounts, but they all assume an increase during this year. In terms of credit incentives, Funcas predicts that the bank “will earn more on each transaction, but at the same time, transactions will be reduced.” In any case, the balance will be positive if there is no economic downturn.”

Savings, mortgages and retirement plans

The decisions made in Frankfurt will also have implications for the pockets of the Spaniards. In fact, they have already begun to have them. The 12-month Euribor, the benchmark index for mortgages, closed in positive territory in April after six years in the red. This trend change may have cost up to 20 euros per month for mortgage loans with floating interest rates, as calculated by Ferrand Font, director of research at the real estate portal, notes that the increase in the index “will lead to a change in trend.” If fixed-rate mortgages have risen to more than 70% of new loans since the start of the pandemic, the Fund believes that a rate increase will change the percentage. One reason is that he predicts that “organizations will offer better terms on variable mortgages.”

BBVA Research believes that the 12-month Euribor will end “the year on a positive note.” However, they note that “financing conditions will remain favorable for both families and companies.” The analytics arm acknowledges that the rate hike will affect the economic effort buyers have to put into the price of a home. In this sense, they note that housing access efforts in 2022 will be around 26% of salary. This rise in mortgage prices will affect household consumption, said Funcas’ senior economist. María Jesús Fernández warns that in an inflationary scenario where spending such as mortgages increases, consumption will fall, which in turn will have repercussions for the economic recovery. However, the savings accumulated by families and the recovery of tourism should be the levers for the Spanish economy to grow by around 4.5 or 5%, according to forecasts by various organizations.

In the investment realm, Victor Alvargonzalez predicts a “dark future for retirement plans.” The analyst argues that Yield will be moderate due to exposure to fixed income. Alvargonzalez believes that if tax credits for private pension plans are also added to, this will not be a very attractive product for Spaniards. “Part of the money will go to investment funds, but a lot will go to bricks, which will make housing more expensive,” he predicts. In this scenario, he proposes that inflation should not be a “threat” but become an “ally”, for example, with investment in raw materials, the price of which has risen in recent months.


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