The European Central Bank’s (ECB) Governing Council raised interest rates on Thursday for the first time in 11 years, with further increases likely in the coming months.

The ECB has raised its interest rates by half a percentage point, to 0.50 percent, to try and slow inflation in the broader Euro area, which in June jumped to 8.6 percent.

The increase represents the biggest increase in 22 years.

In Spain, inflationary pressures are being felt even more severely, reaching record levels.

READ ALSO: Rate of inflation in Spain reaches highest level in 37 years

Why have interest rates been raised?

When prices are increasing too quickly – in other words, when inflation is too high – putting up interest rates is one way to try and slow it down and get the rate back down to the ECB’s 2 percent target rate. 

The theory – and hope for consumers – is that this reduces the prices of products and services in the short term, although Christine Lagarde, President of the ECB, said this week that war in Ukraine likely means that inflation “will remain at an undesirably high level for some time,” and warned that “the economic horizon is darkening” across the Eurozone. 

“Food and energy will continue to be higher than expected,” the president added.

How does it affect life in Spain?

For those of you living in Spain, the main effect of increasing interest rates is on loans, mortgages, and savings, something many foreigners living in Spain rely on.

The impact can be positive or negative, depending on your financial situation.

If you have substantial savings, you could make more money on that lump sum as your savings will become more profitable, particularly if interests rise again.

On the other hand, if you are looking for a loan or credit, or repaying debts or mortgages, doing so could become much more expensive. 

READ ALSO: The products that are more expensive than ever in Spain

Simply put, an increase in interest rates makes loans more expensive – not only at the consumer level but for national governments and banks, too – and it also directly affects mortgage applications and those applying for credit, as well as people who pay a variable rate mortgage based on the Euribor.

Fixed rate mortgages, experts say, are more insulated to interest rate rises.

For many years in Spain, the vast majority of new mortgages signed (as much as 95 percent of them) were variable rate and thus vulnerable to changes in interest rate payments. 

But that trend has reversed in recent years, with around 80 percent of Spanish mortgages now being fixed rate agreements better protected against increased interest rate repayments.

The Euribor is a measure of the average rate of interest rates that banks lend to one another across the Eurozone and used, in effect, as a reference for mortgages. 

This measure has also jumped up in recent months and is now close to 1 percent, and experts forecast that it will see out 2022 at around 1.5 percent this year and that it could surpass 2 percent in 2023. 

These increases in the Euribor rate can have a big impact on consumers and families. For example, the repayments on a standard variable interest rate mortgage loan (a €150,000 loan to be repaid over 15 years, for example) could shoot up by more than €150 per month.

Impact on living costs in Spain

The ECB’s interest rate rises come at a time when Spanish consumers are facing dire economic circumstances, crippled by skyrocketing inflation, utilities bills and increasings goods prices.

According to a survey published by Banco de España this week, the percentage of Spanish families that are forced to use more than 40 percent of their gross income to make debt repayments could rise to about 15 percent as a result of the interest rate rises.

According to the report, the proportion of households with this level of financial vulnerability was just 11 percent in 2020 and 10 percent in 2017.

The increase in debt-strapped consumers was concentrated in the lowest-income households, which jumped from 9.5 percent to 15.1 percent, and those where the main breadwinner in the household was under 35 years of age, which went from 4.4 percent to 6.8 percent, and among the unemployed, which almost doubled and went from 4.9 percent to 8.7 percent. 

The increasing costs of loans and mortgage payments comes at a time the Spanish economy is facing a perfect storm of financial pressures. 

The economic shutdown during the Covid-19 pandemic, which included heavy job losses, combined with rising utilities bills, food prices and rampant inflation – partly caused by war in Ukraine – means that at the very time when many Spaniards might consider taking out a loan to help them survive these pressures, doing so has become more expensive.