ECB rate rise and social implications

In a long-heralded move, the European Central Bank is expected very soon to increase the main interest rate for the euro area, which has been held steady at 2 percent since 2003. The belief was strengthened yesterday by the prospects of a 12th straight rise in short-term US interest rates, which rose to 4 percent, up from 1 percent in June 2004 – the lowest since 1958. Although inflation inside the eurozone remains at a very low level – at least according to the HSCP official index – inflationary pressures are felt to be strong enough to make an increase in the eurozone inflation rate appear unavoidable. Greek consumers may not be stunned by a 1 to 2 percent annual increase in interest rates; they have not fully shed the attitude of the drachma years, when interest rates could fluctuate by as much as 5 percent within the course of one year. Back then, however, incomes also used to soar at a fast rate – which is no longer the case. As a result, a potential increase of interest rates between 1 and 2 percent will have serious repercussions both on a state and on a government level. Given that public debt exceeds 200 billion euros, servicing it will put an extra 2- to 4-billion-euro strain on the state budget per year. Such intense fiscal pressure will, in turn, create the need for extra funds or further cuts in expenditure, sending shock waves throughout society. A hike in continental interest rates would seriously hit households as well. The Greek public must also take measures to absorb the shock. However, even if we assume that consumers have taken voluntary steps to limit short-term consumer loans and credit cards with the already excessive rates, the same cannot be said for long-term house loans, which have mostly been taken out with a floating rate. If interest rates go up, serving these loans will become tougher. In light of looming prospects, borrowers should take all the necessary steps so that they can meet their financial obligations.

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