Why hasn’t Euribor fallen? See image: How sharply expectations for the ECB’s deposit rate have risen

The European Central Bank is expected to begin cutting its key interest rates this Thursday.

The ECB will then cut its Euribor guideline deposit rate from four percent to 3.75 percent.

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However, if interest rate cuts are a certainty in the interest rate market, why is the 12-month Euribor stuck at 3.6-3.7 percent and not falling?

The short answer is that fixed income investors are significantly more skeptical about future interest rate cuts by the ECB this year.

This can be seen in the following diagram.

It shows the future price of the ECB’s deposit rate at the end of last December and the future price for the same thereafter.

Additionally, the figure shows the current futures price of the one-year Eurobor.

Only in autumn 2025 is Euribor below three percent

The market’s Euribor forecast closely follows expectations of the ECB’s deposit rate.

While expectations for ECB interest rate cuts have fallen from four out of five interest rate cuts to just over two this year, the Euribor price has also clearly moderated.

Earlier, the interest rate market was betting that the Euribor would already fall below three percent this summer.

Three percent now will only be below market rates through the fall of 2025.

What really changed?

“At the end of last year, the market seemed more likely to be in a situation where the ECB really needed to revive the economy with monetary policy. The economy was in recession, and corporate pricing seemed to be decelerating rapidly,” he explained. Danish Bank Researcher Andy Ilvonen.

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He points out that the euro recession may have deepened.

“In addition to the steep fundamental scenario, the probability distribution priced by the interest rate options reflected a significant risk scenario at the time, in which interest rates would have been cut even faster,” Ilvonen adds.

In other words, the interest rate market – and even some economists – assumed that the ECB would need to support the euro economy more strongly in 2024. Now the view has changed.


According to Danske’s Antti Ilvonen, the euro economy has endured market interest rates four percent lower than expected.

BE: hand-out

Ilvonen: “The economy tolerated interest rates better than expected”

Since the bottom of the forecasts on December 27, for example, interest rates have already risen by more than one percent by the end of 2025, Ilvonen calculates.

That’s not good news for mortgage borrowers, because current projections suggest the interest burden will drop by that percentage point within a couple of years. Before anything else, this spring’s interest rate revisions didn’t see much relief.

On the other hand, there is good news in the unpleasant change.

“Since the beginning of the year, the euro economy has not only tolerated higher-than-expected interest rates, but has returned to growth,” Ilvonen notes.

“In other words, interest rates are not as tight as previously thought.”

The euro economy grew moderately in the first quarter, and according to forecast indicators, growth is finally strengthening.

On the other hand, this good news has its flip side.

“Inflation has grown much more in line with expectations, but we’re not sure about this when previously weak economic growth was thought to freeze inflation,” Ilvonen says.

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An infant economy reduced manufacturing inflation but not service sector inflation. Core inflation is still around four percent, while the ECB’s general inflation target remains at two percent.

Overall inflation averaged just 2.5 percent, close to the ECB’s target.

Inflation in the service sector, on the other hand, depends mainly on wages in the service sector rising in an even tighter labor market – for example, in German industry, where workers have demanded compensation for lost purchasing power.

Wage inflation is static in nature, and wages generally do not fall.

The mortgage lender still has to follow the inflation announcements

So the ECB will meet on Thursday in a tough spot.

The first interest rate cut was almost announced in church, but for subsequent interest rate cuts, the CEO Christine Lagarde Rarely even slips. The central bank should continue to remain “data driven,” meaning it should wait for some sign of easing price pressures.

“Our updated forecast is two interest rate cuts this year and three next year, which is more in line with the market,” says Ilvonen.

With this forecast, the ECB’s deposit rate will be 2.75 percent at the end of next year, and Euribor will remain at the same levels for that year. At market pricing earlier in the year, both would have been less than two percent.

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