The European Central Bank (ECB) has recently raised the key interest rate from 1.25 percent to 1.5 percent. As announced, the central bank is thus continuing its exit from the crisis policy of cheap money – despite the sovereign debt crisis in some eurozone countries.

 

Picture: Diagram in the business section Image: © Sonia Boukaia / fotolia.com / Text: dpa

Who use low interest rates?

Low interest rates tend to make loans cheaper: companies are investing more, consumers are buying more than they can or want to pay out of pocket. This is boosting the economy.

What’s bad about it, when the money is cheap?

Cheap money can lead to inflation, real estate bubbles and overheating in boom times. In Germany, where the economy is booming like nowhere else in the eurozone, the first industries such as mechanical engineering are already reporting supplier shortages due to high demand. This in turn increases the pressure on prices. Commerzbank fears that persistently low interest rates could underestimate investors’ risks. Eurogroup chief Jean-Claude Juncker warns: “Inflation is like toothpaste: it is easily pushed out of the tube, but very difficult to get back in.”

Who are hurting higher interest rates?

Higher interest rates are weighing on economies with a slowing economy, but also on all debtors. At the moment, higher interest rates could be an additional brake on the economic recovery in debt-ridden countries such as Greece, where rigid austerity measures make the upswing more difficult anyway. But the ECB can not and does not want to take that into account. From the point of view of the monetary authorities, it is up to national governments to eliminate deficits and reduce debt.

Will lending become more expensive for consumers?

As a rule, financial institutions quickly pass on higher interest rates on loans to their customers; in some cases, they praise interest rate hikes upwards even before the actual decision is made. However, mortgages in this country are usually calculated less on the basis of the prime rate than on long-term interest rates on the capital market. Max Herbst from FMH-Finanzberatung points out that this level has recently fallen. This could benefit homeowners now.

Will I get more interest on the savings account soon?

Interest rates on loans often increase banks faster than savings rates. Although the Federal Court of Justice prohibited the institutes arbitrariness in interest rates. Nevertheless, consumer advocates like Frank-Christian Pauli have learned that bank rate hikes will continue to be delayed when it comes to products for the benefit of customers. “It works best where the consumer can change quickly: with call money and savings contracts,” says Pauli. “That’s the power of the market.”

Are there any further interest rate increases?

Economists expect at least a third interest rate move up later this year. Probably another increase in October – again by 0.25 points to then 1.75 percent. This is supported by the relatively high inflation. Because the monetary authorities have basically just “a needle in their compass” as ECB President Jean-Claude Trichet likes to put it: To ensure stable prices for 331 million Europeans in 17 states. After their firefighting operations, the ECB strives for normalcy. Experts believe interest rates below 2.0 percent are only appropriate in times of crisis.

What are other central banks doing?

Zero interest rate policy and money glut – the US Federal Reserve is taking a completely different approach than the ECB. The Federal Reserve (Fed) considers support for the economy to be the key objective of its policy. About two years after the end of the Great Recession, the US economy is not getting back on track as hoped. Fed Chairman Ben Bernanke stated at the end of June that the recovery was “frustratingly slow”. He hinted that the Fed’s zero interest rate policy since late 2008 will not come to an early end. The most important central bank in the world held its key interest rate last at zero to 0.25 percent.