In recent days, the president of the European Central Bank, Christine Lagarde, said that it is very likely that the board of the ECB will raise borrowing rates by another half per cent at its March meeting. She reiterated that this was indicated at the last monetary policy meeting and that the macroeconomic numbers point in such a direction.

Such an increase would mean that the ECB would have raised interest rates by three per cent since July of last year. The reason for such increases has been the high rate of inflation, which currently stands at around eight per cent in the eurozone, with variances between one country and another. Students of economics know that the monetary policy approach to inflation is raising interest rates to dampen consumption and push prices downwards.

It is still unknown whether further increases in interest rates will be required to bring inflation down to the target of two per cent per annum. Some analysts are talking of a peak level of per cent, which would require further rate increases.

An interest rate of four per cent would be the highest ever in the life of the euro. The previous peak was 3.75 per cent reached in 2001.

Rising interest rates may negatively impact both businesses and consumers. It will reduce disposable income for consumers, with a knock-on effect on discretionary spending. Rising interest rates will also have an impact on investment as it may render some investment plans unfeasible.

For those taking out new loans, they would be in a position to assess whether it is still feasible to do so. Issues will arise for those who have loans with variable interest rates. Households with variable rates on their house loans will find it hard to cope with the higher cost of borrowing.

Equally, businesses that are still suffering from the economic slowdown caused by the coronavirus pandemic and are now having to pay back the credit they got (through loans and deferred payments) to cope with such a slowdown, will also find it hard to have the required cash flows to keep them going.

We cannot have commercial banks declaring higher profits and property speculators raking in millions, while young couples struggle to have a decent quality of life

On this situation, the president of the European Central Bank was quoted saying: “I’m sure many banks are prepared to reconsider loan conditions and prepared to spread repayments over time.”

I believe that such a stance is a must for commercial banks. We need to keep in mind that we have had many employers who kept all their staff on their payroll during the coronavirus outbreak, safeguarding their employees’ jobs. We also need to keep in mind that, with few exceptions, real wages have not increased in any significant way in the last years.

This brings us to the situation in Malta. We had some cushion, as when interest rates were decreasing in the last years, our commercial banks did not go all the way. As such, banks were able to absorb the initial increase in interest rates. At this point, the cushion has gradually disappeared, and banks need to decide what to do. Local authorities and regulators also need to evaluate what would be happening. It is in everyone’s interest (excuse the pun) that we avoid bad loans.

I have always believed that property prices are the one big elephant in the room. Reports and published data have consistently shown that property prices are too high for our wages. If young people now have to face higher interest rates, the situation could become unsustainable. Something will have to give.

We cannot have commercial banks declaring higher profits and property speculators raking in millions, while young couples struggle to have a decent quality of life.

Rising interest rates are one big headache for policymakers and regulators.