Winners and losers of the ECB rate hike

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The headquarters of the European Central Bank (ECB) is pictured in Frankfurt am Main, western Germany, June 15, 2022. – European stocks rebounded as the European Central Bank began a emergency meeting to discuss volatility in eurozone bond markets and surging investors also braced for a major US rate hike. (Photo by Daniel ROLAND / AFP)

The European Central Bank is set to turn the page on years of easy money on Thursday by starting to raise interest rates to tame runaway inflation.

Here’s a look at who wins and who loses when borrowing costs rise.

Loans are getting more expensive

Commercial banks borrow money from the ECB which they in turn lend to households and businesses. For years, borrowers have been able to take advantage of ultra-low interest rates designed to spur economic growth.

When the ECB starts raising rates, banks will pass on these higher borrowing costs to customers. Everything from buying a home to refinancing debt or getting a business loan will become more expensive.

Lenders will also scrutinize loan applications more closely to ensure they are not taking on too much risk.

The impact is already being felt in the real estate market, where interest rates on mortgages have risen in recent months.

But the outlook for future owners isn’t all bad, says Comdirect analyst Andreas Lipkow.

“The costs of real estate financing only partly depend on the key ECB rates and are also determined by supply and demand or the creditworthiness of the borrower,” he explains to AFP.

A boost for savers

The ECB’s era of historically low interest rates has meant that savers have seen little or no gain in hoarding money.

The ECB even charged banks a 0.5% fee for storing excess cash at the central bank, to encourage lending.

Many retail banks passed on these costs to wealthy account holders whose deposits exceeded a certain amount. These customers can expect to see these fees waived when the ECB drops its negative bank deposit rate.

As banks welcome the return of higher profit margins, thanks to increased loan income, interest rates on savings products are also expected to rise over time.

But soaring inflation means savings will be further eroded in real terms for some time to come, warns LBBW bank analyst Elmar Voelker.

“The rise in key interest rates (and savings rates) will not be large enough to offset the current high inflation rates,” he says.

Bad news for indebted governments

Eurozone governments will also have to wean themselves off a decade of easy money as sovereign debt becomes more expensive, and the fallout for some of the most indebted members of the currency club is already raising concerns.

The ECB has promised to offer a crisis tool to avoid unwarranted “fragmentation” of bond markets or a sharp divergence in borrowing costs between eurozone countries.

All eyes are on indebted Italy, whose bond yields have already climbed against benchmark German Bunds.

A political crisis unfolding after Prime Minister Mario Draghi offered his resignation last week has further spooked markets.

The tightening of the ECB, although deemed necessary to control inflation, comes at a delicate time for governments who are seeing their borrowing power reduced even as they spend colossal sums to help citizens cope with soaring energy prices.

Investors beware

Stock markets have long benefited from the ECB’s ultra-loose monetary policy, which has pushed investors into riskier assets in search of higher returns.

But as the ECB joins other major central banks in stepping up the fight against inflation and fears of recession grow, global markets are plunging.

The Nasdaq in tech-heavy New York has fallen 30% since late 2021 as cash-strapped tech companies find it harder to attract new funding.

Cryptocurrencies have also fallen out of favor as investors become increasingly risk averse, with Bitcoin losing more than 40% of its value in June alone.

But since the ECB telegraphed its quarter-point rate hike well in advance, financial players “have had plenty of time to prepare, which should avoid severe turbulence” in equity markets, according to Voelker.

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