People dealing with high mortgage rates look to the European Central Bank (ECB) to raise their interest rates. However, there is a possibility that if the ECB hadn’t done so, mortgage rates would have been much higher. So says macroeconomist Edin Mujagic. “And even worse, he had stayed much higher for much longer.”
According to Mujagic, big problems will arise if the central bank does not raise interest rates when inflation rises. “Because the mortgage interest rate—that many people are dealing with—comes from the interest rate on the capital market,” he explains. “And that interest rate is not determined by the ECB, it is created in the market.”
“The mortgage interest comes from the interest rate on the capital market, which is not determined by the ECB”
Those interest rates, in turn, respond to two factors: the outlook for what inflation will do over the next few years and what economic growth will look like. This means that if the ECB does a lot to curb inflation, it will ultimately be good news. Even if mortgage interest rates go up.
Increase
Mujagic points out that mortgage rates and capital market rates have risen considerably over the past twelve months. And not because there are suddenly “spectacular prospects” for economic growth, he says. “It’s actually because of rising inflation,” Mujagic continues. ‘If a central bank – in this case the ECB – does not act decisively, inflation expectations will crash capital markets. And then the mortgage interest will remain too high for much longer.
And so Mujagic does something no one ever thought he could experience: he fights for the ECB. “The fact that the bank has raised interest rates is good news, even if you have a mortgage,” he says. “Because if they hadn’t, it would have become a classic case of cheap is expensive.”
New elevations
Also, the ECB is not done raising interest rates yet. Yesterday the president of the ECB Christine Lagarde announced that a rise in interest rates will also be applied in July. And with that, Mujagic’s cheering also ends. “The fact that they haven’t finished raising rates is partly good news, but their words also show that they don’t intend to raise rates any further.”
Mujagic himself thinks of two or three passes at the most, and even if this will make a difference, he thinks it will prove insufficient in the end. “But for mortgage interest it remains positive that the ECB takes these steps,” he concludes.
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
