14. June 2022
Hugues Chevalier, Economist
For several weeks now, interest rates have risen sharply in a context of a sharp resurgence in inflation. This is a major turnaround, as borrowing is no longer free and requires paying interest. Thus, the German 10-year rate (Bund) rose to 1.06% on 31 May compared with -0.3% at the end of 2021. These levels are still low compared to long-term averages. But since 1980 rates had been falling steadily to reach negative levels during the Covid crisis. This reversal is taking place at a time when debt levels have never been so high. According to UBS, the debt ratio in the euro area (all sectors of the economy) reached 400% of GDP in the last quarter of 2021, 19 points higher than at the end of 2019. The reversal of the trend and the exit from negative rates is good news for savers who have been hit hard in recent years with zero or even negative returns. Moreover, real short-term and long-term rates remain at very low levels for the time being. But in the months to come, rates will continue to rise under the pressure of rising inflation and the increase in key rates by central banks. This will be a complete paradigm shift for borrowers, whether governments, companies or households. Several countries are already borrowing at levels higher than their average repayment rate, such as France and Italy. But the biggest risks concern emerging countries, which are seeing their interest rates soar. For households, the end of free money will affect the residential property sector and therefore the construction sector. On the other hand, for companies, given their cash flow levels, the impact should be limited.