The European Central Bank (ECB) increased last week its main interest rate in order to slow down the ever-rising inflation. Such higher interest rates also affect us and can even lead to a recession. NU.nl explains how.
The higher interest rate – the ECB raised it by 0.5 percentage point – has everything to do with the ever-rising prices. Eurozone price hikes came in at 8.6 percent in June, well above the central bank’s 2 percent target. By pulling the interest rate lever, the ECB hopes to extinguish the inflationary fire.
This all sounds a long way off, but such a higher interest rate also has consequences for us, says economist Peter Rodenburg of the University of Amsterdam. “It determines the interest rates at which banks can borrow or store money at the ECB. The banks pass this on to you and me.”
We can therefore see a higher interest rate when taking out a loan or with our savings account. Borrowing money will cost more money and interest on savings accounts will rise. Those interest rates have to come from far away, so you won’t get rich from saving for the time being.
The ECB decision will also lead to higher mortgage rates. “As a result, the demand for houses will decrease. A higher interest rate also makes other investments more attractive, so that large investors are less likely to put their money in houses. This can cool the housing market,” says Rodenburg.
Higher interest rates could cool the economy further
Higher interest rates can also have negative consequences for our economy. Although it runs well, it is sensitive to high energy prices. Recent figures already show that these lead to smaller buffers and more payment problems for households.
The fact that borrowing money becomes more expensive and saving becomes less unattractive can give the economy an extra push in the wrong direction. “Borrowing money will become more expensive. We will spend less, but companies will also invest less as a result,” says Rodenburg.
This gives rise to the fear that we are heading for a period of moderate growth or even a recession (two quarters of economic contraction in a row, ed.). It is impossible to predict how quickly that can happen, according to the UvA economist, “but analysts expect the economy to cool down further”.
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