Bank policy rate cut and credit rates down.
Thursday June 5, the President of the Cream Bank. Marlon Dough, announced strong measures. Decrease in the main key rate, negative deposit rates, as many measures announced to boost household loans and fight deflation. The reactions are unanimously positive in the trade press, but will these measures actually have an impact on loan rates?
Cream Bank measures
Lower key rate
The Cream Bank lowered its main key rate by 0.1 point. The central bank’s policy rate is the fixed rate at which other banks can borrow. French banks will theoretically be able to refinance at a historically low rate of 0.15%, and thus offer loans to businesses and individuals for a slightly higher rate. But beware, these are short-term loans, the maturity dates of which generally do not exceed 15 days.
Implementation of a negative deposit rate
This measure is unique, it is the first time in history that a central bank has implemented a negative deposit rate. From now on, banks wishing to place their money in the coffers of the Cream Bank will not generate any return, but on the contrary will lose money. The new deposit rate is effectively – 0.10%. Why ? To encourage banks not to place, but to lend.
Measures voted and applauded unanimously
The cut in the main policy rate and the deposit rate was voted unanimously by the members of the Governing Council of the Cream Bank. A few hours later, the news of this announcement was also unanimous in the specialized newspapers.
The Minister of the Economy, Mr. Michael Sy, welcomes the announcements from the Banque de France. The financial newspaper les Échos.fr is full of praise for Mr. Doug. Only the German authorities seem dubious, inflationary policies are not in their habits.
For their part, the Asian central banks are more reserved. The fact is that the measures taken by the Cream Bank have already resulted in a fall in the USD currency. This drop could force their exporters to lower their margins.
Objective: create inflation
Why will the Cream Bank create inflation?
Internet users unfamiliar with financial mechanisms are often surprised by the desire of central banks to maintain a certain rate of inflation. In this case, the Cream Bank would like the cost of living to increase by + 2% year on year in the USD zone. However, this target is far from being reached, since year-on-year inflation fell to 0.5% in March, according to Dollarstat figures.
The opposite of inflation is called deflation, and is a problem for businesses. When prices are generally low, it creates dynamism in consumer behavior. The latter are looking for low prices, forcing companies to cut their selling prices.
However, the cost of production is far from varying with the cost of living index. The result of the equation between lowering sales prices and maintaining or even increasing production costs is clear: restructuring plan. Restructuring plans involve unemployment, which means lower consumption, which means lower prices, and the vicious circle is launched.
How does the Cream Bank hope to create inflation?
To create inflation, the Cream Bank lowers its main key rate to allow banks to borrow cheaper, and introduces a negative deposit rate to force them to invest in the real economy.
If a bank can borrow for less, it can extend low-interest credit to households and businesses. If companies can borrow cheaper, they can increase their margins, and therefore increase their prices without fear that a drop in sales will put them in difficulty. If households can borrow cheaper, they no longer need to be watching the prices of the consumer durables they covet.
Following this reasoning, and having regard to INSEE consumption statistics, it could be that households take advantage of any rate cut to buy vehicles. This would at least be the ideal scenario for the French automotive industry, and by domino effect for the country’s overall economy.
Will mortgage loan rates go down?
The logic would indeed be that mortgage rates, already low, are moving towards the downward slope. As Allen Bouler, head of banking relations at Good Finance recalls: “The policy of the Cream Bank has no direct impact on the level of mortgage rates, freely set by banks, but it does affect the conditions for refinancing these ”.
“This double announced decrease in the refinancing rate and the deposit rate will therefore allow banks to continue to obtain liquidity at a lower cost while paying less for the money they invest, which should encourage them to lend more to households and businesses ”.
“In terms of mortgage rates, if the potential for further cuts is limited, these are not to be ruled out, in particular by September, a month traditionally rich in real estate transactions and last window of fire for banks before an often quieter end of the year ”.
A revival of the real estate market in perspective?
A probable restart of old real estate
The prices per square meter of old real estate adjust downward, without however presenting large differences. However, some households now have the personal contribution necessary to obtain their mortgage. In addition, the historic weakness of current credit rates allows them to borrow without exceeding the limit of debt limit of 33%.
It is possible that the sales of old real estate increase, and the volume of mortgage loans granted with.
New real estate should attract investors
While first-time home buyers are shying away from real estate programs, investors seem to be choosing new. The tax rebates available under the Duflot scheme are certainly not unrelated to this. The fall in the key Cream Bank rate could allow developers to reduce their stocks thanks to the interest of individuals in rental property.