Higher Belgian government borrowing costs have a knock-on effect on households and construction activity. Here's why.
The cost of Belgian 10-year bonds breached 4% on Wednesday, following a global trend that has seen the cost of government borrowing soaring around the world.
The increase pushed long-term interest rates to their highest level since 2012 and follows investor concerns about rising inflation due to the conflict in Iran, which has pushed oil prices higher.
"The rise in long-term interest rates is a global evolution," Philippe Ledent, an economist at ING, told The Brussels Times. "There is no clear specific source of this increase coming from Belgium."
Financial markets are mostly anticipating an increase in interest rates by central banks, according to Ledent, "with high energy prices, markets consider that inflation will be higher for longer than they expected."
What's causing interest rates to go up?
According to reporting by De Tijd, the increase in interest rates is due to several factors alongside the increase in energy prices, each having a compounding effect on the price governments are paying.
Governments worldwide are grappling with rising budget deficits due to new spending demands, such as defence.
The Belgian Federal Government is, once again, looking at how to close the budget deficit, with €10 billion being targeted in the latest round of measures.
Ledent explains that the inability to close the deficit means government loans must be rolled over rather than paid off as they come due.
Compared to when some loans were first issued, some as low as 0% in 2021, the rollover results in a higher rate, widening the deficit even further.
According to De Tijd, forecasters in July said a 1% rise in interest rates would cost the government an additional €178 million this year alone, and €1.1 billion next year. Since July, interest rates on 10-year debt have increased by 0.57%.
When it comes to borrowing, governments are also competing on the debt market with US tech firms, which are borrowing at significant rates for AI investment such as new data centres.
A navy vessel is seen sailing in the Strait of Hormuz, a vital waterway through which much of the world's oil and gas passes. Credit: Belga / AFP
Home buyers will feel the effects of higher interest rates
Importantly, higher interest rates affect more than government budgets. Households, too, will be affected, both positively and negatively.
Belgians have already been gobbling up government debt through newly issued one- and 10-year bonds available for public purchase. In total, the government has raised € 1.255 billion by borrowing from Belgians instead of the financial markets.
The high yield on state bonds has also pushed commercial savings products higher, as banks try to stay competitive.
Now, however, Belgians looking to borrow through a mortgage will feel the effects of higher government-debt interest rates.
Ledent explained that banks, as commercial enterprises, can choose who to lend to and will opt for the highest bidder. If the market is offering 4% on government debt, then mortgage rates have to increase to at least 4% to make offering a mortgage a feasible proposition.
Additionally, because banks must also go to the financial markets to raise debt, they will face a 4% rate, meaning they must secure at least 4% from borrowers to cover their own borrowing costs.
For most homeowners, the impact will be limited, according to Ledent. "The good news is that for those already with a mortgage there is no difference; most people in Belgium are on long-term fixed-rate mortgages."
The key issue is for those looking to move or enter the property market, as they will now face a 4% mortgage rate.
Ledent noted that in 2022, when interest rates rose sharply, this affected the real estate market.
"We didn't see house prices go down, but we saw the number of house purchase transactions going down, and there was a huge decline in activity in the building sector. We might see this again," he said, stressing that anther hit to construction activity is likely, as a follow-through from a rise in interest rates.
