ECB rate rise ‘would dent consumer spending’

A EUROPEAN Central Bank interest rate increase may “put a lid” on consumer spending in Ireland and Portugal and other peripheral euro area countries, said Carsten Brzeski, an economist at ING Group.

The Frankfurt-based central bank may raise its benchmark rate from a record low of 1% after a meeting on April 7, even as countries from Ireland to Portugal struggle to narrow budget deficits, boost economic growth and restore investor confidence.

“The countries that will suffer the most from the first ECB rate hike are the countries that are still in recession,” Mr Brzeski said.

“It’s Spain, Ireland and Portugal.”

Mortgages and consumer loans in these countries are “linked to shorter interest rates,” so people would immediately see their loan payments rise after an ECB rate increase, leaving them less money to spend.

“Consumer spending will remain depressed for a long while,” he said.

Yet the ECB has “no alternative” to raising rates.

“The ECB has always said they need to focus on the eurozone as a whole, on the eurozone average. And when you look at the core eurozone countries, led by Germany, they’re powering ahead. They don’t have this problem.”

The central bank will use liquidity policy to “keep banks in the peripheral countries alive”, he said.

The ECB has “good reasons” to raise interest rates at a meeting later this week, and a minor increase will not threaten the euro zone’s weakest members, OECD chief economist Pier Carlo Padoan said.

“If they decide to raise interest rates, I would say they have good reasons for doing that,” Mr Padoan said.

However, the impact of a minor increase in rates would not be “relevant” for eurozone countries struggling with debt crises because they were already paying high interest rates on the market, he said.