The ECB raises interest rates: what will happen to our pockets?

After more than ten years, the European Central Bank

, taking analysts by surprise with a strong monetary tightening, instead of the 0.25% expected by most. 

In what has been called a worrying economic picture, with inflation dangerously close to double digits, the increase in the cost of money will have direct repercussions on the lives of

.

Meanwhile,

: the increase in central bank rates affects the general level of interest rates and the general level of the cost of money.

If Eurozone banks pay a higher cost to borrow money from the ECB, as a consequence, loans and variable rate loans to businesses and citizens will also be more expensive. 

The reference parameter for variable rate mortgages is the Euribor which, like other interbank interest rates, is very sensitive to changes in the ECB rate.

Furthermore, the increases for citizens and businesses could be

.

An alarm signal comes from the increase in the spread between Italian BTPs and German Bunds which roughly measures the country's level of risk.

For mortgages, the benchmark is the Euribor, but a higher spread weakens banks, which become more prudent in granting loans or grant them at higher rates.

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More expensive variable rate mortgages

How much could mortgage payments rise?

In an elaboration by Codacons on the rate hike decided by the ECB and

, we arrive at the following calculation: assuming a loan of 200 thousand euros for the purchase of a first home in Rome, the monthly payment of a 30-year loan - based on the current Euribor indices and the best current offers on the market - is 619 euros, an installment that will increase to 680 euros per month if the rate hike decided by the ECB is fully transferred to the cost of the loans. 

In theory, a higher expense of

and an increase on the mortgage of 732 euros per year.

Following this logic, with the rate increase of 0.50% transferred entirely to the cost of the loan, a variable rate mortgage would rise in total by 14,640 euros in the case of a 20-year loan, by 18,300 euros for a 25-year loan and € 21,960 for a 30-year mortgage.

It must obviously be considered - and Codacons also specifies - that the trend of variable rates undergoes negative or positive changes during the life of the loan, with different effects on the expense of those who have taken out a mortgage.

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External view of the Milan Stock Exchange

Another effect of the ECB's decision will be the higher

: if rates rise, the states that issue debt securities to finance themselves will have to offer them with higher interest rates.

This could lead to a worsening of the situation for those countries already heavily indebted, such as Italy, net of interventions by the central bank - similar to the “Quantitative Easing” dear to Mario Draghi - to keep spreads low. 

In the case of Italy, a high average duration of the debt, equal to about seven years, with over 70% at a fixed rate,

of an increase in rates and, therefore, in the spread.

Another consequence is the loss in value of the bonds previously issued, as they are less profitable than those newly placed and, therefore, less attractive on the market.

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Tourism in Florence

The increase in interest rates also causes a strengthening of

which, at the moment, is more or less on par with the dollar.

The strengthening of the dollar in recent months is a consequence of rate hikes by the US Federal Reserve: a weak currency

but, on the contrary, penalizes those countries that import many goods, especially

. 

Finally, the general risk of a monetary tightening is a slowdown in growth, due to a

by companies.

In fact, the primary objective of the ECB is to maintain price stability, i.e. inflation around 2%.

When inflation rises beyond the warning limits, with all the ensuing consequences, first of all the loss of value of savings, the Central Bank intervenes by increasing the cost of money and, consequently, reducing the availability of money in circulation. : by doing this, expenses and demand are reduced, but investments also fall.

On the other hand, the consequences of

can be far more serious.