Editor’s note: This article was first published in April 2011. The figures it cites are from that month: the ECB main rate at 1.25%, Spanish inflation at 3.6% and unemployment around 20%. The ECB raised rates once more in July 2011, then began cutting in November 2011.
The European Central Bank has now raised interest rates to 1.25%. The move is meant to keep inflation in the eurozone under control, given the expected rise in the price of oil and all kinds of commodities. With this rate hike, the aim is to keep the CPI below 2%.
But what will be an advantage for some countries could be the final checkmate for household finances in Spain. How will the rate hike affect us?
Mortgages go up
First of all, because Euribor is rising, the average mortgage is expected to go up by about €600 a year. For some families, keeping up with their mortgage on a precarious job, or while simply struggling to find work, is already a luxury. Now it will be even harder to meet those payments, so they’ll have to cut back and save. Saving means consuming less, and if consumption falls again, we hurt the next link in the economic chain: small and medium-sized businesses.
Less purchasing power
With the price of money at 1.25% and inflation at 3.6%, Spaniards’ purchasing power shrinks, so saving will be much harder. On top of that, the European Central Bank expects to keep raising rates. For many people, doing the weekly shopping and filling up the car will become a juggling act.
Unemployment rises
Higher mortgage payments, lower consumption and the need to save even more are three factors that will also hold back investment and the creation of new businesses. Small and medium-sized businesses will be hit as well: some will close and the rest will hold off on hiring. This is the ideal setting for unemployment to rise in Spain. We’re back to the perfect storm in Spain.
See also: Investment analysis: where to invest in September 2011
Some of you may be wondering why the European Central Bank has raised rates if the economy is going to suffer. Well, the ECB raised rates because unemployment has fallen across the eurozone, and it has forgotten that Spain still has 20% unemployment, which is set to keep climbing thanks to this very rate hike.
In short: the European Union has forgotten about Spain.
Featured image: Christopher Neugebauer, CC BY-SA 2.0, via Flickr.
