The US Federal Reserve made a rare interest rate decision on Wednesday. The European Central Bank is also tightening its monetary policy, which is reflected in the wallets of Finns as well.
Of the United States central bank tightened the monetary policy screw historically Wednesday night Finnish time. The central bank raised 0.50 percentage points at once.
Rising interest rates can cause cold shocks in mortgage debtors, for example, as borrowing costs rise and less money is left in hand.
The decision of the US Federal Reserve will not affect the Finnish mortgage lender, but other central banks, such as the European Central Bank (ECB), are also expected to raise their key interest rates.
Prior to spring, the 2022 Euribor rate has been negative since February 2016. Market interest rates have been in the red due to the ECB’s attempts to stimulate economic growth in the euro area through low policy rates and securities purchase programs.
European Central Bank is expected to raise its policy rate by the autumn at the latest. In recent weeks, however, the market has begun to consider it more likely that the tightening of monetary policy will begin as early as the summer due to higher consumer prices, ie higher inflation.
In April, Finland’s most popular mortgage interest rate, ie the 12-month Euribor reference rate rose above the zero limit for the first time in six years. The annual interest rate always reacts first to expectations of an increase in interest rates, as it tends to anticipate the situation after a year. At the beginning of May, the Euribor reference rate for the year was already 0.2 per cent.
The ECB is expected to raise interest rates for the first time this year, as Europe’s inflation rate has accelerated to its fastest in decades.
Money market have priced that the Euribor of the year would rise to just over one percent next year. According to bank economists, mortgage borrowers can expect interest rates on mortgages to be 1–1.5 per cent within a year. Some experts see that households should be prepared for an interest rate of 2-3%.
New loan customers are subjected to a stress test in which financial sustainability and debt service capacity are tested at an interest rate of 6 percent. The realization of such interest rates has been considered very unlikely.
How the interest rate increase is reflected in the mortgagee’s wallet is also affected by, among other things, the method of repaying the loan. Most have either an annuity, an equal installment, or a fixed equal installment. In the case of a traditional 12-month Euribor-linked mortgage, an increase in interest rates means that, depending on the payment method, either the monthly installment increases or the loan term is extended.
See on the counter how the rate hike would affect your mortgage and how much more you would incur per month.
Daily The common Euribor reference rates for the euro area to be published were introduced in early 1999. The highest annual Euribor rate has been 5.53% in its history during the financial crisis in October 2008. Since then, the rate has started to fall sharply as the ECB has rapidly reduced its key interest rate.
The task of the central bank is to control the rate of inflation, the acceleration of which is to be curbed by raising interest rates. The ECB aims for an inflation rate of 2% over the medium term. In the euro area, prices have started to rise sharply, so the central bank is expected to act.
The fact that the US Federal Reserve is tightening its monetary policy faster than the ECB will not have a significant impact on the eurozone, said the professor of economics Antti Ripatti In Helsingin Sanomat on Thursday. Ripatti, who specializes in monetary policy, works at the University of Helsinki.
“It may have some exchange rate effects, but in the overall picture their significance is quite small. The weakening of the euro may accelerate inflation to some extent as imported products become more expensive, but even in the euro area, inflation has been accelerated mainly by energy, ”Ripatti said.
The US Federal Reserve has said the planned rate hikes are relatively clear so that they are not surprises that cause instability in the stock market. This is also expected from the ECB.
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