De Guindos anticipates that interest rates will fall in June: "It is a fait accompli"

The European Central Bank (ECB) is making significant strides towards lowering interest rates, signaling a shift in monetary policy after a two-year period of increases. Vice President Luis de Guindos, a former Minister of Economy in Spain, recently stated in an interview with Le Monde that a rate cut in June is highly likely. This news comes as a relief to those with variable rate mortgages, who have been eagerly awaiting a reduction in interest rates to ease their monthly payments.

While de Guindos remains cautious and believes the battle against inflation is not yet won, he sees the end in sight. He emphasizes that decisions will be data-driven, with the main threat being inflation in services driven by rising salaries. In March, inflation in this sector was at 4% in the eurozone, according to ECB data.

De Guindos acknowledges the need for salary increases to compensate for lost purchasing power but emphasizes that it must be accompanied by improvements in productivity, which is currently lacking. Productivity remains a persistent challenge for the eurozone economy, with levels still below pre-pandemic levels.

Another concern for central banks globally is the geopolitical situation, particularly with ongoing wars in Ukraine and Gaza. The price of oil, despite the instability in the Middle East, has remained relatively contained, but it remains a key focus for global economic stability.

Those eagerly awaiting a drop in interest rates are the approximately four million households in the country with variable-rate mortgages. The ECB’s official interest rates directly impact the Euribor, which is used to calculate monthly payments for variable mortgages. Banks often adjust their interest rates based on ECB decisions, and a rate cut will result in lower mortgage payments.

The hope is that the Euribor will start to decline significantly, resulting in lower mortgage payments. While the indicator reached its peak in October of last year at 4.16%, it has since stabilized around 3.7%. Several interest rate cuts by the ECB are expected to lead to reductions in the Euribor, but substantial downward revisions may take time. In April, the one-year Euribor averaged 3.698%, similar to March.

All eyes are now on the next monetary policy meeting on June 6 in Frankfurt, where the ECB will make its decision on interest rates. The magnitude and potential for additional cuts will depend on incoming data and the actions of other central banks, particularly the US Federal Reserve. While de Guindos remains cautious about what may happen after June, some ECB colleagues have suggested that interest rates could be reduced by 100 basis points throughout the year. This aligns with the ECB’s objective of achieving 2% inflation.

A 100 basis point drop would bring the official interest rate for deposits at the ECB down from the current 4% to 3%, and the main refinancing operations rate, which influences the Euribor, would decrease from 4.5% to 3.5%. Governor Mário Centeno of Portugal and other governors, including Klaas Knot of the Netherlands, Madis Muller of Estonia, and Gediminas Simkus of Lithuania, have expressed inclinations to lower interest rates in recent weeks.