On March 16th 2023, the ECB released a statement indicating that inflation is expected to remain high for an extended period. To address this, the Governing Council has decided to increase the three key ECB interest rates by 50 basis points, with the goal of achieving a timely return of inflation to the 2% medium-term target. The interest rate on the main refinancing operations, as well as the interest rates on the marginal lending facility and the deposit facility, will be raised to 3.50%, 3.75% and 3.00% respectively from March 22nd 2023.
Despite these changes, the ECB's HICP Core Inflation forecast has remained the same, with Belgium at 5.4% and the Eurozone at 8.5% in February 2023. However, it should be noted that the ECB's core inflation index doesn't factor in Energy, Food or Alcohol-related expenses, indicating that the actual level of inflation experienced by consumers is probably well over 10%. This is a worrying situation as it implies that the cost of things like vacations, home renovations and social gatherings has increased significantly.
According to the International Monetary Fund (IMF), banks act as intermediaries between "depositors", who lend money to the bank and "borrowers", who receive loans from the bank. Monies paid by banks on deposits and the income received by banks for loans are both referred to as interest. As such, a significant portion of banks' financing is derived from cash deposited in current and savings accounts by individuals and businesses.
Interest rate changes can, therefore, have a significant impact on the borrowing and investing conditions of commercial banks with central banks. This is why, from a central bank perspective, interest rates are critical tools for managing inflation and currency exchange rates.
The National Bank of Belgium reports that the average lending rate for home purchases is 5.30%, which is understandable given the rate banks pay to borrow money from the ECB. However, a quick Google search reveals that most banks in Belgium offer savings rates that are well below this figure. In its annual report, the NBB has expressed concern that these low rates may threaten the stability of deposits as a source of finance for the Belgian banking sector. Therefore, it suggests that interest payments should be in line with the market situation to prevent money from flowing away from savings accounts to other forms of investment. Hopefully, as interest rates rise, savings rates at banks will also increase.
While there is no magic solution to address the market effects of monetary tightening, it is possible to develop strategies to mitigate these inflationary pressures. At Monnet Capital, we are dedicated to advising clients on the realities of their diminished purchasing power and, more importantly, providing solutions to enhance their short, medium and long-term financial planning.
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