Interest rates rise again in May

The blockade will tighten again on May 4th. The European Central Bank (ECB) will raise interest rates again, but opinions are divided among specialists contacted by Nascer do SOL. There are those who are more optimistic, pointing to an increase of 0.25%, but there are those who risk 0.5%. What is certain is that it will make credit more expensive, for example by increasing the value of the monthly mortgage payments. A situation that will also have ramifications for those who are considering applying for loans.

The data is not encouraging. In the simulations carried out by the ComparaJá.pt platform, interest could rise by more than 100 euros compared to the beginning of the year, but the difference is even more significant if we go back one year (see simulation).

Paolo Rosa, an economist at Carregosa Bank, bets on the first, most optimistic scenario, which is 0.25%, noting that “the probability of this happening is currently 90%, which makes the interest rate on deposits 3.25%.” However, he admits that “there is also a 10% chance that the ECB’s rally will be bolder and reach 50 basis points.” He recalls that in Germany, the eurozone’s main economy and an overall gauge of the ECB’s monetary policy development, inflation remains resilient, with the consumer price index (CPI) slowing slightly and the core CPI (which excludes food and energy) hitting a new historic high of 5.9%. In March, driven by the generalization of inflation across the entire economy, especially services in recent months, after it accelerated a year ago due to the damaging effects of the war in Ukraine.

“However, the significant slowdown in German producer inflation to 7.5% in March, after reaching 45.8% in August last year, promises to reverse the upward trend of German inflation and return it to 2%. Therefore, the ECB must rethink further increases », he points out to our newspaper, also explaining that «in the eurozone, inflation has always been almost exclusively on the supply side and driven by the war in Ukraine».
A behavior that leads the economist to draw attention to the fact that the central bank is doing its job, but admits that it risks “clearly condemning the eurozone economy to stagnation in the coming quarters and anemic growth in the coming years,” also noting that “the political decision-makers in the region do not seem very concerned about Recession, as they seem calm about inflation, with no apparent effort and commitment from governments and other authorities in fighting cartels and other authorities. ». And he gives a red card for the behavior of the entity led by Christine Lagarde. “Certainly, one does not face inflation, especially on the supply side, except with the rise in interest rates, as other authorities play a very important role in curbing the rise in prices. In other words, high inflation seems to have pleased all European governments. The greater propensity to bail out the population in Northern Europe benefited from higher interest rates, and the public debt rates of debtor governments in Southern European countries were favored by high inflation.”

The most pessimistic is Ricardo Evangelista, an analyst at ActivTrades, when he said: “It is expected that the message that inflation remains a concern will be repeated, especially the core that excludes energy and food prices, and thus justifies another increase in interest rates.” This trend is explained by, although there are signs of a slowdown, values ​​that exclude energy and food prices reached a record high in March.

Right now, it’s an estimated 50 basis point increase. But it shouldn’t stop there. According to the official, two more hikes are expected in the coming months: 25 basis points in June and another in July.

The same scenario of a 0.5% increase was indicated by XTB analysts Henrique Tomé and Vitor Madeira and an additional increase of 25 basis points at the next meeting on June 15th. “In addition, the central bank is also expected to continue its policy of monetary tightening with quantitative tightening, that is, to reduce its balance sheet assets.”

Paulo Rosa also says that the money market expects another 25-point rise at the June 15 meeting, setting the deposit rate at 3.%, with an 80% probability of this happening, against a 20% probability of interest rates remaining. Unchanged at the June meeting. However, the final interest rate is currently 3.65%, which, according to the money market, should happen after the summer, at the October meeting.

Impact on families

In terms of influence, Ricardo Evangelista has no doubts. “It will be felt through the rise in the cost of credit. Those who have loans, such as mortgages, with variable rates, will experience a deterioration in interest due to increases in Euribor rates, which usually follow the European Central Bank’s reference interest rates.”

An opinion shared by Paulo Rosa when he acknowledged that higher interest rates will continue to erode significantly the disposable income of households, promising also to punish economic growth due to the decline in private consumption. “The growth of the Portuguese economy is increasingly dependent on tourism and employment. And he stressed that the good performance of the labor market, where nearly five million people work in Portugal, contributed to the increase in the gross domestic product ». The market expects a new rally of 50bps on May 4th and an additional increase of 25bps at the next meeting on June 15th.

Analysts Henrique Tomei and Vitor Madeira acknowledge that the path of interest rates could also change if inflation starts to slow more than expected. However, for those who have the credit, he does mention that the effect can be felt in a number of ways. “In the case of highly indebted families, this will be a problem because they will increase their expenses with loans linked to variable interest rates. The impact of higher interest rates will also have an effect on Portuguese companies resorting to credit with variable rates of interest or making it difficult to obtain additional credit, which leads to an increase in expenses, and thus makes it difficult to raise wages or hire more employees, ”but remember that “These measures are necessary so that pressures on prices can begin to decrease effectively, due to lower consumption and economic activity.”