The ECB raises rates 0.25 points and takes them to all-time highs before going on vacation

The eurozone is going on vacation with a new rate hike that leaves the official price of money at all-time highs since the euro began to circulate in 2002. The European Central Bank (ECB) has not gone out of the script and has decided to raise official interest rates 0.25 points this Thursday, which becomes the ninth consecutive rise in just one year.

According to a quick financial calculation, an increase like the one approved this Thursday by the ECB would imply an increase in the cost of an average mortgage of 375 euros per year (31 euros per month).. A blow that adds to the other eight increases that have occurred since July of last year and that has resulted in a Euribor of 4.01% last month. Thus, a household with an average variable mortgage -150,000 euros at 25 years with a differential of one point over the Euribor- that has to review its loan this month is exposed to a monthly payment increase of up to 290 euros (39% ).

The deposit facility —the interest that the ECB demands from commercial banks for parking funds on their balance sheets— stands at 3.75%, while the rate of the main refinancing operations —which conditions the interest at which the banks— rises to 4.25%. Never before since the euro began to circulate has such a high interest rate been reached in the deposit facility, while the rate of the main refinancing operations equals the previous all-time high reached in July 2008.

Interest rates are the most powerful tool that the ECB has in its hand to influence prices in the euro area. When interest rates rise, indebted households and businesses suffer. Variable mortgages become more expensive, but so do credit cards or consumer loans —for example, to finance the purchase of a vehicle—. In addition, the demand for credit is reduced. On the corporate side, the costs of debt rise and borrowing becomes less appealing, which tends to reduce investment. This series of factors ends up cooling the economy. Demand and investment are reduced and, ultimately, inflation ends up coming down.

The ECB's decision adds more pressure to indebted households and companies, but it could be the last (or penultimate) rise decreed by the body chaired by Christine Lagarde. Inflation has set out on a clear downward path —although more slowly than Frankfurt would like— and, above all, the euro area economy is beginning to show clear signs of exhaustion.

Consequently, Lagarde has opened the door for the first time to the possibility of a pause in rate hikes at the next meeting scheduled for September.. “We could go up or stop. But what is decided in September will not be definitive. It could vary from one meeting to another,” said the ECB president at the press conference after the announcement.. Although raising or maintaining are the two options on the table, the ECB president has at times seemed to opt more for the second. “Do we have a further way to go? At this time, I would not say that,” he added.

Everything will depend on the interpretation that the ECB makes of the data that is published in the next month and a half.. “We are moving into a phase where we are going to rely on data. Based on them, we will decide if we go up or pause. What I assure you is that we are not going to cut. That is a definite no,” Lagarde added.

The central bank will be especially attentive to the evolution of wages and corporate benefits, which are becoming, for Lagarde, the engines of inflation. “On other occasions I have said that we had more ground to cover. What I'm saying now is that the data and our evaluation of the data will really tell us if and how much more ground we have to cover.”

Questioned about the situation in Spain —where inflation stood at 1.9% in June compared to an average of 5.5% in the euro area— Lagarde stated that these are good numbers for the economy and the country, but stressed that the situation in other Member States is very different. “In other countries, inflation is still very high and will remain high for a long time,” he added.

In the statement with which the ECB has reported its decision, the central bank insists that core inflation is still too high, although other indicators show signs of relief. The ECB expects inflation to continue declining for the remainder of the year, although it will remain above its 2% target for a long period.

The problem is that, along the way, the growth of the economy suffers. The latest GDP data for the euro area paint a situation of stagnation with a German economy that has already accumulated two quarters in negative. In addition, the indicators that have been known in recent weeks do not invite optimism. The last one was the European survey of bank loans, which reflects an unprecedented fall in the demand for credit in the last 20 years.