It all starts with inflation. You see it on the shelves, everything is going up and the price increase is over 9% in the euro zone. this inflation can be explained because in recent months, with the post-Covid recovery, there has been more demand than supply, particularly in terms of energy. For example, we need gas, and since Russia, one of the world’s leading gas producers, cuts off the tap, that drives up prices.
As a result, the paradea European Central Bank (ECB), is to raise its rates, to make money more expensive, reduce the quantity of money in circulation and therefore slow down demand, from businesses and households alike. Because this rise in rates, obviously, affects the interest rates applied by your banks, BNP, Crédit Mutuel or other. When you go to apply for a home loan, or a consumer loan, you are already paying more than a few months ago and you will pay even more in the future. So you think twice about it! By raising rates, in effect, the ECB wants to put the brakes on the economy.
The ECB increases its rates by 0.75%: an almost unprecedented level, we have to go back to 1999 to find such an increase. And it’s not over: Christine Lagarde warns, there will be other increases because the objective is to bring inflation down to 2%. And that marks a real change, because until then the ECB applied negative rates, we were in the opposite phenomenon: the ECB was trying to boost the economy, to revive growth. Suddenly, it lent everything, free of charge, money so that companies and individuals buy, invest, build.
The ECB forecasts zero growth in the euro zone at the end of the year and at the start of 2023, but which should therefore normally be accompanied by a drop in prices, particularly in real estate.
In reality, the difficulty for central banks is to find the right balance. slow down the economy, without stopping it completely, slow down without completely stopping the engine. Otherwise, the risk is total failure.