What is the origin of the rise in interest rates? What does this mean for you? Decryption.
Once upon a time...
The outbreak of Covid-19 sounded the death knell for global growth when it appeared in 2019.
Many companies faced unprecedented production and distribution challenges.
Face-to-face work was replaced by teleworking, short-time work was introduced around the world, and strategic facilities such as airports and ports were put to the test.
Once the crisis is over, a return to a semblance of normality has been observed in the United States and Europe, but major constraints remain in place in Asia, particularly in China, where the zero-Covid policy continues to cause frustration among local populations and businesses.
In particular, the industrial and technological component manufacturing sectors continue to be hit hard.
Globalization put to the test
Until then, the impact on prices has been very limited or non-existent. Supply was down but demand remained stable, thanks to online purchases.
What was supposed to last a few weeks lasted for months, then years. This has had the effect of completely disrupting the supply chain on a global level.
Your smartphone is made up of components from almost every continent and the journey of your product, from its design, to its assembly, to its packaging to its distribution in a point of sale, represents thousands of kilometers, hundreds of people and depends on a well-oiled supply chain, free of any delays or unforeseen events.
This applies to your child's toy, to the building materials of your property, to the chip needed to start your new vehicle... All consumer goods were affected.
At the end of Covid, demand started to rise again but supply remained limited due to significant delays accumulated at the logistical level. Prices began to rise.
Soviet influence
If that wasn't enough, the terrible events of early 2022 in Ukraine further impacted a certain fragility of the markets.
Vladimir Putin's invasion of Ukraine provoked a political and economic reaction unprecedented since the Second World War. No more gas supply via Nord Stream, no more cheap oil, no more abundance of fossil fuels.
This has had the merit of accelerating green energy production initiatives and has caused the price of gas and, consequently, oil to skyrocket.
This factor alone had a significant impact on inflation that was already well established. All households are now facing a significant increase in the prices of food, heating, fuel and certain services.
The Reaction
In order to regulate rising inflation that weighs on households, central banks decided to raise key interest rates. These rates, which set the price for banks to borrow money, have a direct influence on the borrowing rates charged by these same banks to their customers.
The idea is to make access to money more expensive in order to limit investments and the inflationary spiral of wages, bonuses and therefore expenses.
In principle, this results in a drop in demand, which automatically reduces the rise in prices. As the offer should be more attractive in order to boost purchases, price competition would have its effect in this direction.
There is, of course, a latent period when prices remain high and so do rates. This is the period we are going through.
What about your mortgage?
It's complicated, isn't it?
Gone are the sunny days of negative interest rates allowing you to benefit from new money at low prices.
Admittedly, it couldn't last forever. Some of us had become accustomed to it and for good reason, because it had been about ten years since the financing of an apartment or a car had been done on very advantageous terms.
However, this was not always the case in the past.
And today?
Imagine that the conditions remain historically interesting.
The problem is that the impact is measured by the amount of capital borrowed. The higher the amount of the repayment, the more serious the impact on your monthly expenses.
To take the case of a mortgage, just imagine what tripling your monthly loan repayments would involve...
This is the new reality that many of us will have to face in the coming years.
"But there is no need to panic. It is quite possible that the situation will ease somewhat again. In addition, the interest rate hikes already announced by the US and European central banks are already priced in and will no longer have a significant impact on the mortgage market – especially for long-term ones. (Excerpt from L'Illustré, October 2022)
So there's no need to worry about renewing your mortgage? Sandrine Duvoisin from Retraites Populaires answers:
"There has been a very sharp rise in interest rates over the last six months, but the situation has eased in recent weeks. For a five-year loan, the interest rate is around 2.5%. At ten years, it is 2.9%. This easing of interest rates brings us closer to the interest rates of a decade ago. My advice is to make a so-called mixed mortgage, i.e. one part with a short and/or medium term rate, and another with a longer term. (Excerpt from Le Temps, October 2022)
And what about the value of your home?
"Demand for residential property has eased slightly due to the anticipation of persistently higher financing costs," says Francis Schwartz, economist at Raiffeisen Switzerland.
"But supply remains so limited that the drop in demand is not enough to interrupt price dynamics."
High interest rates also mean a higher return on my investments, right?
In theory, yes. The reality, however, is less clear-cut. Although you may benefit from a lower return than before, it is still very low and you need a certain amount of capital locked in over a considerable period of time to reap the benefits.
Milenia.
As a leading Swiss financing platform, Milenia is now the partner of choice for thousands of customers wishing to access credit to finance their projects.
We will not be able to solve supply problems or stop the war in Ukraine, but we can act locally and stay true to the values that drive us on a daily basis.
We can continue to put our clients at the center of our attention and guarantee them a personalized service dedicated to the realization of their personal projects.
Today, it's more important than ever to dream and make it happen.
Financing your studies, your housing, your cash flow, your vehicle, your vacations, your wedding... all those unforgettable moments that make up your life journey.
Milenia is by your side in these precious moments. So let's talk about it together and let's play the competition so that you can benefit from the best possible rate!
