Heels|The twelve-month Euribor is now historically much lower than the three-month Euribor. According to experts, the difference is explained by the unprecedented situation in the economy.
Finland the most popular mortgage reference rate for 12 months is now historically much lower than the three-month Euribor. The gap is greater than it has ever been before.
Euriborbite interest rates have come down rapidly towards the end of the summer.
The 12-month Euribor, the most commonly used mortgage reference rate in Finland, was recorded at 3.117 percent on Thursday. The interest rate fell to its lowest level since December 2022. There is already a decrease of 0.46 percentage points since the beginning of July.
The three-month Euribor, which has grown in popularity as a mortgage reference rate, has also come down, but clearly less than the twelve-month rate.
The three-month euribor was recorded at 3.549 percent on Thursday. The now seen difference of 0.432 percentage points to the 12-month interest rate is the largest in the history of Euribor rates.
itthat the three-month interest rate is higher than the 12-month interest rate is normal in times of falling interest rates, says Nordea’s chief analyst Jan von Gerich.
In practice, Euribors try to predict what level the European Central Bank’s (ECB) key interest rate will be in the future. The one-year euribor predicts the level at which the policy rate will be on average during the coming 12 months, and the three-month euribor, on the other hand, predicts the average level of the policy rate for three months.
“The 12-month Euribor horizon accommodates more interest rate cut expectations,” says von Gerich.
“Three months doesn’t even fit all of this year’s ECB meetings, where interest rate cuts are decided.”
Also the chief economist of Handelsbanken Finland Timo Hirvonen notes that the interest rate difference indicates that the market clearly expects the ECB to continue lowering the key interest rate next year. When interest rates end, the relationship between Euribor rates will also reverse.
“Before long, we will return to a situation where the three-month Euribor becomes lower than the 12-month interest rate,” says Hirvonen.
What explain the growth of the interest rate differential to a historically high level?
According to Hirvonen, the big difference is explained by the fact that interest rates are calculated in a new situation.
“In the past, when the interest rate has been lowered, there has been a bigger problem in the economy, such as the financial crisis,” says Hirvonen.
Von Gerich also states that there has never been a similar situation before.
“If you think about the history of the euro, it is quite short. It doesn’t fit very many calculation cycles.”
According to von Gerich, it would be unlikely that the ECB would make large interest rate cuts in the three-month period.
Instead, longer-term expectations are now strong in the market. The twelve-month Euribor level currently predicts more interest rate cuts than Nordea’s own forecast predicts, says von Gerich.
That is why the difference in interest rates has also grown exceptionally large.
Hirvonen thinks that another reason for the big difference in interest rates in the United States may be those directed at the US central bank expectations of a rapid decrease in the key interest rate.
As a result of the weak economic figures, the rapidly growing expectations may have also been reflected in the expectations of the ECB’s interest rate cut reflected in the 12-month Euribor, says Hirvonen.
His mortgage however, those thinking about the reference rate should remember to look further into the future.
“If you think about the mortgage horizon, which is tens of years, then you should not draw the conclusion that the 12-month Euribor will always be lower than the three-month one in the future,” von Gerich reminds.
Hirvonen also states that a twelve-month interest rate gives predictability to the borrower’s finances, but in the long run, a shorter interest rate will be cheaper.
“Historically, a shorter interest rate has been more affordable than a 12-month interest rate. Now we are in an exceptional situation.”.
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