- On 21 July the ECB raised rates by half a point, more than announced in June, and left negative rates behind.
- It unveiled an instrument to avoid tensions in the debt of the most indebted countries; that same day Mario Draghi resigned in Italy.
- The fastest rate rise in the euro’s history was beginning: the impact on variable-rate mortgages and financing would arrive with the reviews of 2023.
On 21 July 2022 the European Central Bank raised interest rates by half a point, more than it had announced in June, and left negative rates behind. It also unveiled an instrument to avoid tensions in the debt of the most indebted countries. That same day Mario Draghi resigned in Italy, adding a political ingredient to a day already heavy with economic content. The coincidence of both items of news on the same date was a reminder of how intertwined politics and the economy are in the euro area.
It was the ECB’s first rise in eleven years, and it came in a more decisive tone than expected. For millions of households and companies in the euro area, it marked the start of a change in the financial environment: money stopped being almost free and the cost of debt began to rise visibly. The decision confirmed that the central bank’s priority was to curb inflation, even at the price of making credit dearer.
More than announced
In June the ECB had spoken of a quarter point. Raising rates by half a point in July was a signal of urgency: inflation was worrying enough to bring forward the pace. And leaving negative rates behind closed an exceptional chapter of European monetary policy.
When a central bank exceeds its own communicated expectations, it sends a message of determination, but it also reduces economic agents’ ability to plan with certainty. That is why companies and families do well not to treat any announced figure as a ceiling or a floor: future moves will depend on the data and may be larger or smaller than expected. The most useful signal for anyone who has to plan is that the direction of rates was clear, even if the exact pace was not.
A safety net for the most indebted countries
The instrument presented the same day aimed to prevent the rate rise from causing disproportionate tensions in the debt of the most indebted countries. It is a way of protecting the cohesion of the euro area, because the financing conditions of one state affect the whole, which is why the ECB watches the coherence of its monetary policy.
In a monetary union, all countries share the same interest rate policy, but not all have the same debt burden or the same capacity to cope with it. If one country’s financing cost soared for reasons unrelated to its real situation, it could pass tensions on to the rest. A mechanism of this kind aims to avoid that risk without giving up the fight against inflation.
The impact would come later
The fastest rate rise in the euro’s history was beginning. For variable-rate mortgages and company financing, the impact would be felt in full in 2023, as payments were reviewed. Anticipating that calendar makes it possible to decide in good time whether to fix the rate, pay down or renegotiate.
A good practice is to build a calendar with the review dates of each loan, calculate how much payments would rise under different rate scenarios and check whether the budget can bear it. If not, there is room to act before the review arrives. Talking to the lender and to an adviser makes it possible to put the options in order and decide calmly. Every family or company should know in which month its loan is reviewed and with which index, because that fact turns a general piece of news into a concrete figure.
The effect of a rate rise does not arrive the same day: it arrives with each review.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
