Ebury: commento settimanale sull’Euribor

So far this year, the main focus of market attention has been on expectations of interest rate cuts in the major economies, which in turn has determined the evolution of other key indicators for citizens, such as the Euribor, the benchmark for variable mortgages.

At the beginning of the year, markets assumed that interest rates would remain high for longer than initially expected. This caused Euribor, closely linked to the expectations and evolution of the European Central Bank’s interest rates, to break three consecutive months of declines in February and close the month at 3.671% on average, slightly higher than in January. In March, Euribor recorded its second consecutive monthly rise and closed the month at 3.718%, its highest level since November.

Since then, however, a change in trend was observed and the Euribor gradually declined again, as the ECB’s rate cuts seemed increasingly real. In April, the indicator closed the month at 3.703%, down slightly from the previous month. In May, Euribor recorded another slight monthly decline, closing the month at 3.68%. The reference indicator for mortgages once again brought good news for mortgage holders in June, as it fell for the third consecutive month, closing the month at 3.65% on average, due to the rate cut delivered by the European Central Bank at its June meeting. It is true that the ECB’s rate move was expected, but since the central bank kicked off its easing cycle, the decline in Euribor has been continuous. In fact, the Euribor fell again in July, closing the month at 3.526% on average.

Until July, the Euribor maintained a fairly stable trend, and the falls were fairly contained. However, this stability has now been broken and we are seeing a real decline in the indicator. In fact, the fall in the indicator in August was very significant and the average for the month declined to 3.166%, thus registering its fifth consecutive monthly fall. Moreover, August’s fall was the biggest month-on-month drop since October 2022 and the biggest year-on-year fall since March 2013. Undoubtedly, this sharp drop is good news for both the mortgage market and for citizens who have taken out a variable-rate mortgage, who will finally see their mortgage repayments fall at the next review.

In September the Euribor continued to decline in its daily rate, falling below 3% for the first time since December 2022, as markets seemed to have anticipated the expected rate cut at the ECB’s September meeting. As expected, the ECB cut rates by 25 basis points at its September meeting. Thus, after the further cut of 25 basis points, the eurozone deposit rate stands at 3.5%.

However, the central bank implied to the markets that another interest rate cut in October is unlikely, which, as we anticipated, led to a slight rebound in the Euribor daily rate in the days following the meeting, as before the meeting the markets were assigning a possibility of a 25 basis point cut in October.

This week, all eyes were on the Federal Reserve’s September meeting, where the central bank finally kicked off its easing cycle with a jumbo 50 basis point cut. This allowed Euribor to resume its daily rate declines and brought the September average down to 3%. A large rate cut, in theory, should put downward pressure on global debt and interest rates. In this scenario, the Euribor could see the falls it has been experiencing for much of September accelerate, as the Euribor responds to the interest applied by banks in their operations to finance each other, a rate that is also subject to market pressures.

Looking ahead, the ECB’s statements at the September meeting were consistent with our view that the ECB will maintain the quarterly cuts for now, with the next one not coming until December. Although the near-term growth outlook has worsened, the priority remains the fight against inflation, which clearly has not yet been won. The likelihood that the pace of ECB cuts will be gradual could also lead to a slight rebound in the Euribor. For all these reasons, although uncertainty about where the indicator will stand at the end of the year is high, we maintain our forecast that the Euribor will be around 3% by the end of 2024.

Itsaso Apezteguia Extramiana, Ebury Market Analyst