Hike in interest rates, the former ECB economist explains why they impact on people's lives

The

, through the announcement of its president

, has decided to raise

by

.

It happens for the third consecutive time, in contrast to the accommodative stance of monetary policy.

We asked

, economist and private consultant in finance and macroeconomic studies, to explain to us how this decision impacts on the lives of businesses and families.

Zaccarella was

and an expert on macroeconomics and financial stability at the same ECB.

In the past he was also an analyst of the monetary policy portfolio at the Bank of Italy.

Here he answers and comments in a personal capacity.

Dr. Zaccarella, let's explain this first point: what does the 75 basis point increase in interest rates mean in practice?

It means that as of today, private banks in the euro area will have to pay a rate of 2% when borrowing from the ECB.

That is, banks are now paying 0.75% more than yesterday;

until yesterday, however, the rate was set at 1.25%.

This rate, now set at 2%, is the most important of the three ECB rates and is the so-called main refinancing rate.

The decision is in line with market expectations.

Does the situation we find ourselves in now, of severe price increases and geopolitical instability, require such a decision?

Central banks must act independently from governments and this must be emphasized.

The main tool to curb inflation is currently only one: the rise in rates.

If you want a cheaper "shopping cart", you have to act by raising interest rates, with all due respect to some critics.

In recent days, several economists have criticized this choice.

None of these economists have led a central bank during a time of turbulence like the present one.

The criticism is that the current situation did not make this choice necessary and that the ECB should have "stalled" to make life easier for governments and public budgets.

However,

contemporary history and European rules remind us that a monetary policy is effective only and only if the central bank acts independently.

The ECB has already done a lot and also on this occasion was able to communicate this historic choice to the market in an exemplary manner and is implementing a policy of gradual rate hikes.

How, more concretely, does the increase in the cost of money affect consumption and people's wages?

Let's explain it for the layman ...

For example, those who want to buy a house will have to pay more interest.

The new smartphone, if I decide to buy it in installments, could cost me more!

Unfortunately, there are side effects.

After all, all treatments have side effects.

However, it is hoped that the rate hike measure will counteract inflation;

that is, bread, pasta, gasoline and bills stop increasing and the "shopping cart" becomes more accessible to workers and families.

Inflation, explains the ECB, continues to be far too high and will remain above target for an extended period of time.

Yes, we need raw materials and structural reforms.

With the war in Ukraine, the price of wheat reached unimaginable peaks a year ago.

Not to mention energy and gas.

Worldwide, there is even a shortage of microchips.

Productions of mobile phones, cars and various household appliances have reached absurd prices.

A big step forward came thanks to the previous Italian government, which obtained joint purchases and the European gas price ceiling.

Now we need investments in renewable energy infrastructures and we need to digitize our economy.

Only in this way will we transform this crisis into an opportunity.

rainews

Pasquale Zaccarella

In September, euro area inflation reached

In recent months, the surge in energy and food prices, supply bottlenecks and the recovery in demand after the pandemic have led to a generalization of price pressures and a rise in inflation.

Absolutely.

As we said before, the conflict in Ukraine has brought back an old theme dear to many: why are there developed nations like Italy that for decades have not been able to be energetically independent?

Because no one invests in production systems, possibly modern and sustainable, which guarantee us that the supply is reached at affordable prices and without having an excessive impact on the environment.

The ECB has always responded to crises, now it's up to governments.

This time, financial resources are not lacking.

Just read the numbers of the PNRR.

The Governing Council's monetary policy therefore aims to reduce demand support.

Because?

What does it mean to reduce demand support? 

I like to read it like this: it is a cure for excessive debt.

Applying for a loan for the purchase of any asset costs more from today.

For businesses, financing from banks will cost more.

Therefore, it is feared that all these will lead families to spend less or to buy only what is strictly necessary.

Regarding companies, the concern is the higher cost of financing: an entrepreneur will have to pay more interest and could hire and invest less.

And maybe he decides to postpone the purchase of a new warehouse or a new generation company car.

However, I read the ECB's choice as a policy, or even better a cure, which aims to reduce the indebtedness of our economy.

If you get into debt in a situation of high prices, you end up financing speculation.

The governor of the ECB predicts that the economy will weaken in the coming months: "This phase will probably last for the rest of the year and until the first part of 2023," said Lagarde.

"High inflation, problems with gas supplies and worries about the future lead people to buy less and companies to reduce production."

Press releases and meetings on rates almost always close with a liturgical and repetitive phrase: "Decisions will be made from time to time at each meeting".

After all, central bankers (only) sometimes use their hearts ...