Consumer loan rates must rise to reduce inflation
Government reassurances to the contrary notwithstanding, it seems that, eventually, all major Greek banks will follow Alpha Bank’s lead and increase their loan rates, even if the European Central Bank (ECB) reduces its own intervention rate on March 6. This increase is the result, first of all, of the banks’ need to boost their profitability, in a period fraught with uncertainty and far from conducive to easy ways to boost one’s income. The other reason refers to the need to «correct» certain categories of loans where rates had fallen too fast, even below EU averages, and where certain interventions by watchdogs – on the issue of compound interest, for example – added to the bank costs. There are two ways to view these increases, in terms of their effect on the economy. A rise in the rates of personal loans – which has exclusively occupied the public and the media so far – may add slightly to the burden of these households that have taken out mortgages or loans to acquire some consumer goods, but it is good for the economy, since it will serve to curb consumption and, through that, inflation. It leads to what some of us in the press have been calling for during the last two years: a bit of rationalization in the credit market. In fact, household indebtedness, although less than in other countries, has been rising too steeply for comfort. It was high time to curb a phenomenon that had macroeconomic effects, such as more inflation and loss of competitiveness, but also very tangible micro-effects, as in the distress caused to ever-indebted individuals and households. Similar calls have been issuing forth from the Bank of Greece. Besides, economists and even the wider public would prefer a little added burden for some of us than a weak overall banking system. What would our reaction be if banks, like consumer goods retailers, starting chasing us and saying that we need not start paying back our loans until three years later? All reasonable citizens would recoil at the state of the banking system. On the other hand, raising corporate loans may have the opposite effect, stifling investment and boosting inflation. That is why the ECB ought to reduce its rate so as to provide little excuse for bankers to raise corporate credit excessively.
