- On 14 September the ECB raised rates for the tenth consecutive time, taking the deposit rate to 4%, a record high.
- It hinted this might be the last rise of the cycle, without committing to it.
- That a rise is the last does not mean rates will fall at once: it is worth preparing wealth and the company for high rates for longer.
On 14 September 2023 the ECB raised rates for the tenth consecutive time and took the deposit rate to 4%, a record high. It also hinted that this might be the last rise of the cycle, although without committing to it.
The news closed a very intense phase of monetary tightening in the euro area and opened another, that of waiting for the accumulated effects. For households and companies, the question was no longer just how much rates would rise, but how long they would stay at those levels and how much room remained to adapt to a cost of money that no longer resembled that of a few years earlier. Monetary policy decisions are passed on with a delay, so the full effect of ten consecutive rises would not be seen until well into the following year, something the ECB itself took into account when suggesting a possible pause.
A record high
The 4% marked a record high for the deposit rate. The ECB’s message was cautious: it hinted at a possible end to the rises, but without tying its hands.
The deposit rate is the one paid on the money banks leave with the central bank, and it is the reference with which the ECB sets its policy at the time. Although it is not the rate paid directly by families and companies, its movements are passed on to the Euribor, variable-rate mortgages, loans and the return on deposits. When rates are above zero, deposits become a real alternative again for those wanting security and liquidity, while debt financing ceases to be an almost free resource and calls for more careful analysis.
From negative to 4%
In a little over a year, the price of money had gone from negative to 4%. So rapid a change is unusual and affects everything: payments on variable-rate mortgages, the cost of business financing, the return on deposits and the valuation of assets that depend on rates, such as property.
Those who had grown used to an environment of nearly free money now faced a radically different scenario. Plans made with almost zero rates, for example a leveraged purchase or an investment financed with debt, needed reviewing in the light of the new cost, which could substantially change their viability. Assets whose value is calculated by discounting future cash flows, such as property or businesses, are especially sensitive to rates, because a higher discount rate reduces the present value of those flows.
What is worth reviewing
It was the moment to check whether wealth and the company were prepared for high rates for longer. Families can check how much variable payments weigh in their budget and how much room they have if rates stay high. Companies can review debt maturities, hedges and working-capital needs.
And anyone with savings can analyse, with advice, what options exist for no longer holding idle cash, taking into account maturities, liquidity and the guarantees of each product. That a rise is the last does not mean rates will fall at once: central banks usually keep rates high for a while before considering cuts. An orderly review starts with a list of all debts, with their rate, term and next review, and of all savings, with their return, term and availability, to check how they fit together.
A pause in rate rises is not yet the start of cuts, and it pays to plan with that difference in mind.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
