The European Central Bank (ECB) is expected to raise interest rates next week by half a point. Capital Economics has predicted that the ECB will continue hiking rates up to a plateau of 3.5% later this year. In this blog post, we’ll discuss why the ECB is raising interest rates and what it could mean for businesses and consumers in the eurozone.
Why is the ECB Raising Interest Rates?
The eurozone economy has been surprisingly resilient over the past few years despite its slow growth rate, prompting the ECB to make a move on interest rates. By increasing interest rates, the central bank hopes to reduce inflationary pressures and keep growth on track for years to come.
What Does This Mean For Businesses?
For businesses, an increase in interest rates means their borrowing costs will also go up. Companies taking out loans with variable interest rates will see their payments increase immediately once the new rate is set. This may be difficult for some small businesses already struggling financially due to economic pressures such as Brexit or global trade wars.
Additionally, higher borrowing costs may lead companies to cut back on new projects and hiring plans, which could further stall economic growth.
What Does This Mean For Consumers?
For consumers, an increase in interest rates could mean higher mortgage repayments or higher credit card bills if they have variable-rate debt. However, savers should benefit from increased returns on their deposits as banks look to pass on some of the rate increases to customers looking for better returns on their money.
In addition, those who have locked in fixed-rate mortgages before now will not see any changes in their payments since these are unaffected by changes in interest rate levels.
With a 50 basis point rate hike at next week’s ECB meeting seemingly a done deal, it appears likely that the eurozone’s economy is strong enough for further hikes later this year up until a plateau of 3.5%. Businesses and consumers should note how this could affect them directly or indirectly when making financial decisions going forward.
Ultimately though, what matters most is how well economies can cope with these changes and remain resilient despite them – something that will only become clear over time once we’re able observe how well they react accordingly.