ECB Hikes Rates to 2.5% Amid High Inflation

The European Central Bank raised its main interest rate to 2.5%. This is the primary tool used to fight high inflation. Fuel costs remain the main driver of current price increases. Money is becoming more expensive for all economic agents. Banks add their margin to the cost of funds when pricing loans. New consumer loans will become more costly. Existing variable-rate mortgages are already affected. These products track the Euribor, which sits near 3%. The cost of financing has already risen for many households.

Banks also face higher funding costs. They borrow from the ECB or other financial institutions. They also use customer deposits for their operations. Small and neobanks are offering remunerated accounts. These accounts pay between 2% and 2.5% annual interest. Standard bank deposits offer between 3% and 3.5% APR. Using customer deposits is cheaper for banks than borrowing from the ECB. This dynamic creates a competition for household savings. Banks may increase rates on savings products to attract funds.

Savings Returns Lag Behind Inflation

Higher interest rates benefit conservative savers. Banks will likely raise remuneration on deposits. This provides a low-risk option for individuals. However, the net return remains low. The 2% to 3% gross interest does not cover inflation. Taxes are deducted from the profit earned. The standard tax rate on these gains is 19%. The real value of the money decreases. A higher nominal yield does not mean wealth growth. The purchasing power of savings continues to shrink.

Bank Funding Mechanisms Shift

Institutions diversify their sources of capital. Credit facilities from the central bank are one source. Interbank lending is another. Customer accounts provide a third stream. The cost of each source fluctuates. Banks choose the cheapest option available. If deposit rates rise, the ECB facility becomes less attractive. This shifts the balance of power. Households gain leverage in negotiating bank products. The market for savings becomes more competitive. Banks must pay more to retain liquidity.

Consumer Borrowing Costs Increase

The pass-through to borrowers is direct. Banks increase the base rate on new credit. The operating margin remains fixed. The total interest paid by the borrower rises. This affects car loans and personal credit. Mortgage rates are already high due to Euribor. Future fixed-rate products will be more expensive. The cost of debt is the primary lever. Higher rates dampen demand for credit. This helps cool economic activity. The central bank aims to stabilize prices. The burden falls on new debtors.