The ECB decided to increase the three benchmark rates by 50 basis points, following two increases of 75 basis points announced at previous meetings. A necessary step to try to calm inflation and should be followed by at least one further hike in 2023. As a result, the interest rate on the main refinancing facility, the interest rate on the marginal lending facility and on deposits will be respectively at 2.50%, 2.75% and 2% starting from December 21, 2022. European stock exchanges closed the session sharply lower: Milan lost 3.45%, Paris lost 3.09%, Frankfurt 3, and 28%. The Btp-Bund spread comes to 206, with the yield on the Italian 10-year note up 28 basis points, to 4.13%. The slump on Wall Street also dampened the markets’ mood, with indexes down more than 2%.
New increases in 2023
Frankfurt said in a note that the board believes interest rates must still be raised substantially and at a steady pace to reach levels restrained enough to ensure a timely return of inflation to the medium-term target of 2%. Compared to the analysis conducted last June, the context of financial stability has worsened due to the weakening of the economy and the increase in credit risks. In addition, sovereign vulnerabilities have increased due to weak economic prospects and weaker fiscal stances, as explained by European Central Bank President Christine Lagarde. The Fed also eased its tightening pace on Wednesday, December 16, raising interest rates by 50 basis points as expected, but Chairman Jerome Powell warned that it would take a long period of slow growth to curb inflation. Government Bond Purchase Program (APP) at a measured and predictable pace, in which the Eurosystem will only partially reinvest principal payments on maturing bonds. The pace of this reduction is an average of 15 billion euros per month until the end of the second quarter of 2023, Frankfurt announced. The due amount is about half of the securities that mature each month.
Btp above 4%
After the ECB’s monetary policy decisions, the market is once again looking at Italian debt as riskier than Greek debt along the entire yield curve. The ten-year BTP yield is 4.15% from 3.85% yesterday.
Public debt record
Meanwhile, the Italian public debt continues to rise, rising to 2,770 billion euros in October compared to the previous month due to public administration debt, which increased by 27.7 billion. This was announced by the Bank of Italy with the statistical publication Public Finance: Requirements and Debts. The increase, Bankitalia explains, is due to the increase in Treasury liquid assets (14.6 billion, to 62.6) and borrowing requirements (9.9 billion) and the overall impact of spreads and premiums on issuance and redemption, revaluation of inflation-linked securities and changes in exchange rates (3.2 billion).
Mortgage rate 3.02%
An increase in interest rates by the European Central Bank will have major implications for variable rate mortgages. In its monthly report, the ABI notes that after adjustments to ECB rates, the average rate of new transactions for home purchases rose to 3.02% from 2.75% in the previous month, the highest since August 2014. Accordingly. For a simulation by Facile.it, a variable rate mortgage of €126,000 over 25 years signed in January 2022, with a starting price (tan) of 0.67%, corresponding to an initial monthly premium of €456, could increase by 39% compared to the beginning of the year. After the three rate increases by the European Central Bank, the current installment has already reached around 602 euros, almost 150 euros more than the initial installment. If the ECB confirms a new increase in the cost of money by 50 basis points, assuming that Euribor grows in a similar way, the monthly payment to the borrower will rise, in the coming months, to about 636, roughly 35 euros more compared to today and more than 180 at the start of general (+ 39%).
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