In its latest study, Allianz SE and Euler Hermes analyze the impact of monetary normalization on debt service payments of the private sector in the eurozone. In contrast to the public sector (and big companies), the bulk of smaller companies and households cannot shield themselves against rising rates by issuing long-term debt, locking in current ultra-low interest rate levels. For them, dependent on bank loans, the “pass-through” is much faster; in fact, even today roughly 80 percent of new corporate bank loans have a rate fixation of less than one year (if at all); the notable exception relates to mortgage loans in a number of eurozone countries, including Germany.
We use regression analyses to estimate how an increase in the European Central Bank (ECB) key interest rate will impact average interest rates on bank loans for households and the corporate sector. In doing so, we have built three scenarios for the development of the ECB key interest rate up to 2022. Our base scenario is one of “soft normalization,” with the ECB only starting to hike the key rate from 2019 onwards; the other two scenarios are called “moderate” and “hard normalization”. Based on our assumptions, the key rate would reach 2 percent at end-2022 in the base scenario, 3 percent in the second and 4.25 percent in the third scenario. At the same time, we have assumed that the years of deleveraging have also come to an end: with the moderate recovery in the euro area continuing, private debt will rise in sync with overall economic activity.
“The days of extremely low interest rates are numbered,” said Michael Heise, Chief Economist at Allianz SE. “So fears in the market are growing that the withdrawal of cheap money could bring the economy crashing down – because it rests on a foundation of debt and economic players are hooked on the "drug" of cheap money. But our study clearly shows: the additional interest burden for the private sector in the eurozone remains moderate on the whole. It is certainly not an excuse for continuing to print money: from this perspective, there is nothing standing in the way of a return to normal monetary policy.”