On Thursday 14 June the president of the ECB, Mario Draghi, announced that from 2019 January XNUMX the Eurotower will close the taps of the quantitative easing, the securities purchase program which since 2015 has brought public and private bonds worth trillions of euros into Frankfurt. As for instead interest rates, they will rise again from the summer of next year.
What does all this mean for the real economy?
WHAT CHANGES FOR FIXED-RATE MORTGAGES…
Let's start with mortgages. Those who have already subscribed to a fixed-rate one can rest assured: the installment does not change. Those who have not yet taken out a mortgage, but would like to do so, must hurry up and sign. In anticipation of the increase in rates applied by the ECB, in fact, it is foreseeable that as early as September some banks will increase the spread (ie their profit margin) on long-term contracts. In other words, the new fixed-rate mortgages will be less convenient than those taken out in the last three years. On a twenty-year loan of 100 thousand euros, an increase in the rate from 2 to 3% entails an increase in the installment of 10%, from around 500 to around 550 euros per month.
…AND FOR THOSE WITH VARIABLE RATE
The situation is different for the floating rate. Usually this type of mortgage is pegged to the 3-month Euribor rate, which is currently negative (-0,32%). There shouldn't be any significant changes until the rate applied to banks that deposit their funds in the ECB's coffers rises (today at -0,40%). However, when, in a year's time, the Eurotower will put its hand on the reference rates, it will also increase the Euribor, which will drag along the variable rate of mortgages. It won't be pleasant, but it won't be dramatic either, considering that an increase of 0,3/0,4% would raise the installment by around twenty euros.
IS IT CONVENIENT FOR SAVERS?
For those who have invested their savings, however, the end of the ECB's ultra-expansive monetary policy is mixed news: positive for those who have bet on bonds and potentially negative for those who have chosen the stock market.
WHAT IS CHANGING ON THE BOND MARKET…
The wave of Eurotower buying has sent bond yields plummeting in recent years. This has created problems for institutional investors such as pension funds, which however have managed to make ends meet thanks to low inflation, which has made it possible to keep the real value of the invested capital practically unchanged. In the short term this scenario will change, because inflation should stabilize at the ECB's target quota (lower but close to 2%) and in parallel bond yields will start to rise again, once again becoming attractive to savers.
…AND ON THE STOCK
The situation is reversed for the stock market, which has benefited from QE for two reasons: first, because the intervention of the ECB (together with the economic recovery) has dramatically increased the liquidity in circulation, favoring investments and increasing the propensity to risk; second, because low bond yields have led many investors to divert capital to equities. In theory, the end of the quantitative easing and rate hikes should reverse this trend. On the other hand, the operation will be very gradual and the course of share prices is also influenced by many other factors, so the change in monetary policy alone is not enough to predict the start of a negative phase.
