The last tick in the box: Next Thursday, the ECB will cut interest rates, but there’s no cause for celebration


Interest Rate Market It’s almost certain: the European Central Bank will begin its interest rate cuts next Thursday, June 6, 2024.

The probability of this in the market is about 94 percent.

However, Friday’s May inflation announcement did not give the ECB firm support for interest rate cuts, leaving mortgage lenders with no reason to celebrate next week.

Consumer prices rose 2.6 percent from a year ago, higher than in April. Core inflation, net of energy prices, rose to 2.9 percent, indicating that inflation in the services sector was still too fast for the central bank — and may have accelerated, at least temporarily.

The ECB’s inflation target of two percent is still in sight, but the central bank must proceed cautiously with interest rate cuts and cannot declare victory in the inflation battle.

What does this mean for the mortgage borrower? The truth is that his celebrations are also moving.

The interest rate market has become more skeptical than ever this year, with two more interest rate cuts predicted for the current year and the same number for next year. That means Euribor will stay above three percent until next year.

The shift in opinion explains the fact that the 12-month Euribor is no longer falling.

The decline is flat from 4.2 percent last fall, and interest rates have been frozen at 3.6–3.75 percent. It looks like more patience is needed from the ECB and mortgage lenders.

The effect of the interest rate hike on the euro economy is unfortunate, as the easing of fiscal conditions is likely to be limited to a few percentage points this year, and the euro economy badly needs a boost to growth.

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However, a month is just a month, and come summer or fall, inflationary trends and interest rate reactions can be pleasantly surprising. This kind of optimism is surprisingly strongly propagated by the ECB’s chief economist Philip Lane Since the beginning of the week Financial Times. Lane’s message is that in his calculations the euro area’s “real equilibrium interest rate” is slightly above zero percent.

That is, the ECB’s deposit rate does not tighten or loosen monetary conditions too much, remaining slightly higher than inflation (in economic equilibrium). Twisting the wire: When inflation falls to two percent, the ECB’s base deposit rate will be 2.2-2.3 percent.

In other words, the interest rate has plenty of room to fall from the current four percent — and from the expected 3.75 percent: up to one and a half percentage points.

The Chief Economist’s theoretical outlook is not comforting to the mortgage lender. And it won’t provide much-needed support to the housing market, whose implementation will be critical to the economy. However, the long-term outlook gives hope that when the exceptional conditions recede, the interest rate will not be three percent, but clearly lower, closer to two.

At that point, even the skepticism of the interest rate market will evaporate surprisingly quickly.

Based on Lane’s view, the fact that interest rates will fall below two percent in the fall is not comforting. First, we can imagine that long-awaited rise.

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