Overnight account holders are unlikely to be able to wait for this day, but those planning a home loan soon or needing to lock in a new interest rate will be less enthusiastic: there are increasing signs that capital market rates are about to turn around. A rise in interest rates looks increasingly likely in the near future. For real estate buyers, house builders or many credit prospective customers this means: new building credits or interest fixed periods for installment credits become more expensive!
Sign 1: The economy is picking up speed across Europe
Responsible for the continuing low interest rate phase is the European Central Bank, ECB for short. Their president Mario Draghi and his Euro bankers initiated it with various capital market instruments to stimulate the lame European economy. Low interest rates mean cheap loans, was the credo here. In turn, these cheap loans should revive consumption, investment, and thus the overall economy. Whether this works reveals, among other things, the inflation rate – as a yardstick defined a rate of just under two percent. If this parameter approaches the ECB's targets, there will no longer be any reason for the bank to keep interest rates low. And that is exactly what it currently looks like.
In the spring of 2017, banks granted around 2.5 percent more loans to households or businesses than in the previous year. So it's actually consuming and investing. In addition, the inflation rate in the euro area was already very close to the ECB's ideal at 1.9 percent in April 2017. And the other economic data from the member countries also fit into the picture. The economy is getting off the ground on a broad European basis. These are all indicators that the ECB will soon loosen its screws on the interest rate level.
Sign 2: More and more resistance
The ECB's policy was never without controversy. But now it is being criticized more and more openly by many politicians and bankers in the eurozone. You always ask more directly: isn't it long past time to cut back on flooding the markets with cheap money? Bank chief Draghi is still resisting the move, seeing the rise in inflation mainly as a result of rising energy and food prices rather than a signal of a general economic recovery. But how long can the Italian maintain his opinion? When the pressure on him becomes too great? Because it has long been clear that the vast sums of cheap money in recent years have fueled one thing in particular: the stock markets. Fears of this bubble bursting are high, as a stock market crash could easily trigger the next global financial crisis.
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Sign 3: No more reaction possibilities
These are exactly the kind of crisis scenarios that are making some financial experts' hair stand on end right now. If this happens – or if the economic recovery quickly runs out of steam again – the European Central Bank is relatively helpless and is largely condemned to stand by and watch. After buying a staggering two trillion euros worth of government bonds, the ECB no longer has an effective arrow in its quiver, and with key interest rates at 0.0 percent, further rate cuts – i.e., the decision to go negative – would be impossible if it didn't want to add fuel to the fire of a possible crisis scenario.
Sign 4: The great European election year
France has already done it, electing Emmanuel Macron as its new president. In Germany, the next major election of a leading European nation is coming up soon. And for years now, the ECB has regularly been suspected of repeatedly linking its decisions to political calculations. The neoliberal Macron relieves the financial circles of a whole bundle of worries about the political stability in the Eurozone at once. Low interest rates or even negative interest rates are a no-go for him. Shortly after Macron's election, the ECB also changed its choice of words. While negative interest rates have always been a deliberately communicated possible further option, Mario Draghi's statements are now 1already limited exclusively to keeping interest rates at their current level for an "extended period of time".
In the French election, the ECB was still holding back with its nuanced hints until the result of the second ballot was known, so as not to exert any influence whatsoever. Before the upcoming federal election in Germany, however, there will be another interest rate decision by the central bankers at the beginning of September. It is quite possible that the ECB is waiting for this date to announce the first – even if only marginally – positive key interest rate since spring 2016, in order to provide some reassurance to German voters who fear for their savings. It would be a signal that both parties in the current German government could well use, as it would defuse the election campaign by an important issue: the preservation of the value of private assets combined with the question of adequate retirement provision.
Sign 5: First changes in America
The Fed has already taken the next step. Already at the end of 2015, it raised the key interest rate again for the first time and let 2016 or 2017 further increases follow. As a result, the U.S. prime rate has long since cracked the 1 percent mark again. This also increases the interest rate of American government bonds. The weaker interest-bearing paper of European nations threatens to become more and more of a storekeeper. Thus, there is also pressure from this direction on the central bank to slowly raise interest rates again.