Last week, the European Central Bank (ECB) raised its key interest rate in order to slow down the ever-rising inflation. Such a higher interest rate also has consequences for us and can even lead to a recession.
The higher interest rate – the ECB raised it by 0.5 percentage points-has everything to do with ever-rising prices. The price increase in the eurozone came to 8.6 percent in June, well above the central bank’s 2 percent target. By pulling the interest rate lever, the ECB hopes to extinguish the inflation fire.
It determines at what interest rates banks can borrow or deposit money with the ECB. The banks will pass this on to you and me.
We can therefore see a higher interest rate when taking out a loan or with our savings account. Borrowing money will cost more money and interest rates on savings accounts will go up. Those interest rates have to come from afar, so saving won’t get you rich right away for the time being.
The ECB decision will also lead to a higher mortgage rate. This will reduce the demand for houses. Furthermore, higher interest rates make other investments more attractive, making large investors less likely to put their money into homes. This can cool the housing market.
Higher interest rates can also have a negative impact on our economy. Although it runs well, it is sensitive to the high energy prices. Recent figures already show that these lead to smaller buffers and more payment problems for households.
The fact that borrowing money becomes more expensive and saving becomes less unattractive can then give the economy an extra push in the wrong direction. Borrowing money is becoming more expensive. We will spend less, but companies will also invest less.
Because of this, there is a fear that we will go to a period of moderate growth or even a recession go. How quickly that can happen can not be predicted, but analysts expect the economy to cool down further.
