The hangover from the ECB’s new rate cut is leading to the fifth consecutive daily drop in the Euribor, which stands at over 2.7%, very close to annual lows. The president was careful not to offer any clues about future movements, but the market, experts and the Euribor itself are convinced that the decreases in rates will not stop in the coming months. At least until the summer they see it clear that the ECB will make cuts per meeting. Good news for mortgages. But it is also true that they already see the end of the falls.
The big question about the Euribor is very clear. Where and when will its fall stop? And things are starting to clear up. The mortgage index is handcuffed to the official ECB rates. Right now there is around 50 basis points of differential between the Euribor and the deposit rate, which suffered a cut yesterday to 3.25%. The mortgage benchmark is functioning as a leading indicator of the ECB’s movements, but in the end its fate will be cast at the end of the cut cycle.
The floor for rate cuts and, by extension, the Euribor, already has a set dateeven the levels where they can land. Many analysts and the Euribor market and futures, at this time, see the end of the cycle at the end of 2025 and with a high degree of coincidence. Something that had not happened in the last year.
Since the end of 2023, the market had been pricing in a savagery of cuts by central banks. Nobody saw them. Neither the central banks themselves, nor the experts for the excellent economic health. But the economy is starting to fail. More specifically, employment. And now there is an alignment for the large cut in interest rates by the central banks, and especially, the ECB.
Lagarde once again dressed as an arcane, but there were several details to screw the expectations of rates below 2%. Yesterday’s cut had been in the works for weeks, but in September the ECB’s message was one of pause, so developments have caused the institution to change pace. And another is that the ECB finds it difficult to move rates without having growth and inflation forecasts.. Yesterday was not due, the outlook is not published until the end of September.
Experts and operators look at the OIS model of swaps financial statements that reflect investors’ hedged positions in the face of interest rate fluctuations. It is a very good indicator because around billions of dollars move based on the movements of the ECB and it is closely followed by analysts and the central banks themselves. The system anticipates a cut per meeting until the summer, which should bring rates to 2% and adds that at the end of 2025 an additional cut so that they remain above 1.75%.
Wall Street expects sharp declines in 2025
The funniest thing is that now it is the analysts who see rates still at lower levels than the market. For months it has been the other way around. “Yesterday’s ECB meeting marked the beginning of an era of consecutive easing, although Lagarde continued to describe the process as dependent on data and meeting after meeting. Now a cycle of rapid cuts is the consensus,” comments from Bank of America, one of the largest investment banks on Wall Street. The firm sees the rate floor at 1.5% at the end of the year.
They are not the only ones. Other banks such as Citi or ABN Amro also see rates at this level. However, the consensus collected by Bloomberg places rates at the end of 2025 above 2%. The most aggressive analysis houses are those that see the European economy stuck and in trouble.
For the Euribor it represents a wide margin of additional fall for next year. Index futures, another way for investors to secure their positions, also point to an indicator below 2%. Specifically, three-month contracts, expiring in December 2025, are quoted at 1.855%.
Seventh month of fall
The Euribor is heading to close this month of October above 2.75%. Mortgage reviews are carried out with the monthly average. It will be the seventh month of consecutive falls. And it will lead to the biggest cut in mortgage payments since the Euribor began to fall last year.
To see it with an example, for a mortgage of 140,000 euros for 30 years (360 months), with a differential of 1% and taking the month of October 2023 as a reference (since most mortgages are reviewed at 12 months) , when the Euribor closed at 4.16%, the monthly payment was 765.30 euros.
Now, with the provisional average for October 2024, which stands at 2.759%, the mortgage payment of homeowners who have a review in September will drop to 617.62 euroswhich means they will pay 147.68 euros less than a year ago and the first drops in the monthly payments of those mortgaged will begin to be noticed.
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