Interest rate increase causes anxiety in the Greek market for further price hikes

The Piraeus Chamber of Commerce and Industry-EVEP is expressing concerns about even greater price pressures in trade and industry, following the developments of the EU proposals and the decisions of the ECB. According to a relevant announcement, EVEP expects that the activation of the weapon of increasing interest rates will stabilize prices at today’s high levels rather than reduce inflation, while it is certain that borrowing is now becoming more expensive. In the first assessment in the Greek market, due to the liquidity of banks, the first increase is not expected to create a particular rise in fixed interest rates, but it will automatically increase loans linked to Euribor by half to one unit, burdening old borrowers and limiting the credit expansion of businesses .

Policy change

The European Central Bank announced, on July 21, the change in monetary policy in the eurozone with the first increase in interest rates since 2011. The ECB decided to aggressively tackle inflation by increasing the three main interest rates by 50 basis points. Accordingly, the main refinancing operations rate, the marginal financing facility rate and the deposit acceptance facility rate will respectively increase to 0.50%, 0.75% and 0.00% with effect from 27 July 2022. The rally in EU inflation and absolute euro-dollar parity, led to the acceleration of more interest rate hikes. July 2022 thus marked the end of negative interest rates, after eight years (since 2014), when the key rate was reduced to -0.10%. Combined, in fact, with the fewer flows since the re-opening of Nord Stream 1, Europe is being called upon to face a new energy and monetary scenario of restrictions and uncertainty.

The new tool

At the same time, the ECB introduced a new monetary tool called the TPI “Transmission Protection Instrument” in an attempt to contain spreads. The Transmission Protection Facility is an uncapped bond buying tool that will help markets better adjust to future sharp interest rate hikes, faster than expected. After all, the acceleration of the exit from negative interest rates allows the transition to an approach according to which the ECB’s interest rate decisions will be made on a meeting-by-meeting basis, with the next one on September 8.

Greece is among the countries set to benefit from the TPI, which is facing double-digit inflation, as well as Italy, which is facing political unrest. According to the ECB, the mechanism will come with four soft commitments for the governments that will use it. A Bloomberg survey shows that the new monetary tool can mitigate fragmentation shocks, but it will first have to convince the markets of its effectiveness, also containing the spreads of benchmark German bonds, which pose risks to the single currency.

Warning

The International Financial Institute has, however, warned that the increase in interest rates and the normalization of monetary policy may trigger a new debt crisis from the increase in borrowing costs of the countries of the European South. Nevertheless, for Greece, the European Commission in its summer forecast revised its previous growth forecast from 3.5% to 4%, despite higher inflation estimates.

The Greek CPI is expected to be higher at 8.9%, compared to 6.3% previously. Stubborn inflation looks set to slow to 2.4% in 2023, compared with 3.1% in the spring forecast, while ING forecasts 4.2% growth for Greece boosted by tourism. It should be noted that analysts even see inflation at 9.7%, but do not expect the short-term effects to derail this year’s growth, nor that threats from energy and inflation will stop investment and tourism.

Triple front

The President of EVEP, Vassilis Korkidis, regarding the recent developments noted that Europe is faced with a triple front: lower inflows of Russian natural gas, the more expensive money from the aggressive increase in interest rates against inflation and the cohesion in the EU’s energy plan. Furthermore, he added that it must deal with these drastically in order  to avoid energy poverty, stagflation and recession. Possibly, like the TRI for spreads, a tool to protect businesses from sharp increases in bank rates should also be created, Mr. Korkidis opined