- On 7 March the ECB delayed any interest rate increase until at least the end of 2019.
- It announced a new round of cheap loans to banks (TLTRO III) to sustain lending.
- Low rates favour those who borrow and penalise those who save: it pays to ask what happens when they change.
On 7 March 2019 the European Central Bank (ECB) delayed any interest rate increase until at least the end of 2019. At the same meeting it announced a new round of cheap loans to banks, known as TLTRO III. The underlying message was that money would stay cheap for longer than had been expected until then. It is one of those decisions that are not felt immediately in daily life, but that end up shaping the price of a good part of the financial operations of companies and families.
The ECB’s decisions reach every corner of the European economy. They shape the cost of variable-rate mortgages, of loans to companies and the return on deposits. That is why a change in the timetable for rates is not a technical matter for specialists, but a variable that alters the accounts of households, small businesses and large companies, and affects how any financial decision is approached.
What the ECB decided
The European Central Bank sets interest rates for the euro area. By postponing any increase, it signalled that money would stay cheap for longer than expected. It is a way of supporting economic activity, because low rates make financing cheaper and encourage investment and spending, although they also have side effects.
TLTROs are long-term loans the central bank offers banks on favourable terms so that they keep lending to companies and families. The logic is simple: if banks can fund themselves cheaply and for a long time, they have more room to keep granting loans, something that matters especially when the economy loses momentum. The effectiveness of such measures depends on banks actually passing those conditions on to the customer, which varies by institution, sector and moment.
Effects on credit
With low rates for longer, financing for a company or a variable-rate mortgage stays at low levels. Those with debts linked to market rates see their payments not rise, which gives some relief to family budgets and eases the planning of business investment.
But that same situation means savers earn little on their deposits, and banks have less room to earn from lending. A prolonged low-rate environment can also encourage excessive borrowing if it is read as a permanent state of affairs, something the experience of other cycles advises against. For those saving over a long horizon, this situation calls for rethinking how much of the money needs to be available and how much can tolerate some variation.
Two sides of the same coin
Low rates favour those who borrow and penalise those who save. It is therefore worth looking at one’s own position realistically: what debt there is, at what rate, how much cash is held uninvested and when that money will be needed. It is an exercise in putting things in order that any family or company can do with real figures on the table.
An adviser can help put it in order and set out scenarios: what would happen to payments if rates rose again, how much room the cash position would have and whether the debt structure is reasonable for the horizon of each need. It is not about guessing when rates will change, but about making sure the plan withstands it when they do. It is a common-sense review that any company or family can carry out once or twice a year, and whose value is greatest precisely when the environment seems calm.
Low rates are not permanent; it is better to ask what would happen when they change.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
