The ECB warns of the slowdown in consumption among those mortgaged at a variable rate

2023-08-10 13:02:34

The European Central Bank (ECB) issues a serious warning about the impact that the rise in interest rates is having on consumption, especially for families with variable-rate mortgages that in recent times have suffered a notable increase in the cost of their installments monthly in the heat of the rapid rise of the Euribor.

Although the objective of the current monetary policy is precisely to cool down demand to avoid inflationary tensions, the supervisor acknowledges that the current scenario has particularly affected this type of household, whose spending expectations “are more sensitive to variations in interest rates expected”. In its latest Economic Bulletin published this Thursday, the ECB ensures that families tend to reduce the growth of their real spending when these expectations regarding future mortgage rates increase.

According to his estimate, for each percentage point that these expectations advance, the growth of expected spending falls 0.05 points. «Distinguishing between renters, homeowners without a mortgage, owners with a fixed-rate mortgage and those with a variable rate, the empirical analysis shows that households in the latter group expect to reduce their consumption growth three times as much as the household. middle of the population,” warns the agency.

At the other extreme, no changes are observed among those mortgaged at a fixed rate. Consumers who since last year have been progressively incorporating the impact of interest rate rises into their spending decisions.

The problem is that if it goes too far, the economy runs the risk of moderating its growth more than expected. Especially since household consumption is one of the engines of GDP in the entire region.

excess savings

It is not the first time that the ECB has sent a notice of these characteristics. Just a few weeks ago, the agency already warned that another of the bases for families to continue spending, the excess savings generated during the pandemic, has suffered a notable ‘worm effect’ due to the impact of inflation.

In the Spanish case, the Bank of Spain recently calculated that families still have a cushion of about 50,000 million euros of this extraordinary savings only in deposits. However, in his report he made it clear that “this pocket of extraordinary savings cannot be expected to provide a very significant boost to aggregate household consumption in the coming quarters.” The cause? That the increase in interest rates is forcing these resources to be used to pay increasingly expensive debts.

In its Economic Bulletin, the ECB also notes that access to bank financing is increasingly difficult for families. The demand for credit continues to fall. But the banks also continue to toughen the approval criteria -and the interest rates- for their loans. “The rise in credit rates continues to be higher for companies than for households” in the euro zone, according to the supervisor. Specifically, the interest rates applied to new loans granted to companies rose to 4.57% in May (its highest level since the end of 2008), compared with 4.39% in April 2023 and the 1.83% in June 2022, before the monetary policy tightening cycle began.

Similarly, interest rates on mortgages to access a home also continued to increase in May and stood at an average of 3.58% in the region. A year earlier, they were around 1.97% in June 2022.

The ECB does reflect, however, how consumers expect those rates to start stabilizing at current levels. But not so the award criteria. So the perspective is that accessing a mortgage will continue to be difficult for certain groups. “The lower risk tolerance of credit institutions, the increase in financing costs and the worsening of the financial situation” also contribute to this scenario.