Anticipated Decreases in Euribor: Good News for Variable Rate Mortgages

The Euribor will not go up any more. This affirmation that many families with variable rate mortgages expect, or need, is a reality according to the futures curve. It is not that you can bet everything on it, but investors and also banks, anticipate decreases in the interbank rate in the coming months. Although it will continue at high levels compared to the reality of the last decade, when it was negative.

Thus, what the market anticipates is that there will be a oxygen balloon, but not much more, for those people who have suffered the increase in mortgage payments due to having variable rate loans established in recent years (if they are older, the impact of the increase is less). It also benefits families and companies that are going to request credit in the coming months, since it is a reference for the future evolution of market rates.

Indeed, the futures curve indicates that the Euribor has peaked. The most followed approximation is that of the three-month Euribor future, which is trading at 3.9% in December 2023 and 3.3% in 2024. The three-month Euribor is currently at 3.8%, with what that there is hardly any room for more increases, and there will be a setback during the next year. In fact, at 12 months, this indicator is often used to see what will happen to the 12-month Euribor or with expectations about the ECB’s deposit facility rates.

Banks already work with this hypothesis. In the last presentation of quarterly results, two weeks ago, Gonzalo Gortázar, CEO of CaixaBank, already stated that The rise in the Euribor is a problem for families that will declinepredicting that it will end 2023 below 4% (the 12-month interbank is now trading at 4.05%), and also predicting that in April 2024 it will be below the level of April this year, when it stood at a average of 3.757%.

Gortázar also recalled that, when talking about increases in the cost of mortgages of 300 euros per month, reference is made to examples of loans of 150,000 euros that have been recently established, but the average living variable rate mortgage is, on average, 65,000 euros, and the impact is limited to between 90 and 100 euros.

The two Spains: the families that pay off their mortgage and those that ask for consumer credit

Oscar Gimenez

Either way, the cumulative inflation mix in the last two years, and the increase in interest rates, has hit the personal finances of families. Banks note how households are using savings to pay off debts, when there are any, and there are also many families who choose to request consumer credit to maintain their current living standards. Delinquency is contained, but there are already early warning signs.

What no one expects is that interest rates will return in the short or medium term to the levels prior to this cycle of increases led by central banks to fight inflation. A price increase, which began with the bottlenecks and energywas consolidated with the war in Ukraine, and has ended up feeding itself with the feared second-round effects (inflation that causes inflation).

The fact that the euro economy is on the verge of recession raises the chances that the cycle of increases is close to its end

The aforementioned futures curve aims at the Euribor at 3% at the end of 2025, a level clearly lower than the current one, but well above the -0.5% that it registered in January 2022, before a vertiginous rise that has put some families on the ropes, and has provoked proposals from the government parties, colliding in the messages against the bank, after both parties agreed on the Code of Good Practices for mortgagees in a vulnerable situation, which has had many fewer requests than expected. Which can be interpreted as good news, or as not working, as Vice President Yolanda Díaz has suggested on occasion.

The evolution of the Euribor will depend on the rate policy of the European Central Bank (ECB), and this, on inflation, which continues well above the 2% target. In July it stood at 5.3%, two tenths less than the previous month and the lowest level since January 2022, but with the underlying (excluding energy and non-perishable food) at 5.5%. But, as everything goes by expectations, the fact that the euro economy is on the verge of recession raises the chances that the cycle of increases is close to its end. Less economic activity, which is what the ECB is looking for by raising rates and draining liquidity from its balance sheet, also reduces inflation expectations.

The ECB raises rates 25 basis points, to 4.25%, and the market sees the end near

Oscar Gimenez

At the last meeting, in July, the ECB raised rates again by another 25 basis points, to 4.25%, but the message was not as harsh or hawkish as in previous encounters, admitting progress in the fight against inflation. The experts are divided between that there is an additional increase or none, and few point to more. However, the labor market (both employment and wages) and consumption continue to surprise due to their robustnessthe same as the services sector, although manufacturing activity is in full contraction.

Where there are doubts is in anticipating whether the central bank will leave the rates at the levels at which they stop, which, as the ECB always repeats, will be “sufficiently restrictive for the time necessary to get inflation back to the target soon 2% in the medium term”. The Chief Economist Philip Lane has said that rates will probably settle at “low levels” when the shock of inflation. But of course it has to happen.

For now, what is beginning to reappear are the you dovish, turned off in the last year. Fabio Panetta, a member of the ECB’s Executive Board, noted this week that monetary policy “must be prudent” to control inflation without unnecessarily damaging growth. In other words, not to go too far, which, in fact, is one of the main fears that Spanish institutional investors have, as shown by the Market Sentiment Survey of El Confidencial.

The funds worsen their macro vision of Spain in full political uncertainty

Oscar Gimenez carlos rodriguez

But it does not seem that there will be significant rate cuts if you look at market expectations. It is true that investors are betting that the Euribor will recoil, but not beyond 3%, after a rally from -0.5% to 4%. The German 10-year bond remains above 2.5% despite suspicions that the ECB will stop raising rates soon, if it hasn’t already. While in recent weeks it has come close to the yield of the two-year bond. The curve is still inverted, but the gap is narrowing. The same is true in the United States.

Experts interpret these movements as the market anticipates high rates for a long period of time. If this is the case, the curve would once again have a positive slope, with longer-term bonds with higher returns than short-term ones. Other economists, however, remember that, when the shock With current inflation, structural deflationary pressures in the West stemming from technological innovation, reduced productivity growth, and population aging will return. Perhaps Lane is in this group of experts, but for now he has not passed the shock inflationary.

The Euribor will not go up any more. This affirmation that many families with variable rate mortgages expect, or need, is a reality according to the futures curve. It is not that you can bet everything on it, but investors and also banks, anticipate decreases in the interbank rate in the coming months. Although it will continue at high levels compared to the reality of the last decade, when it was negative.