How long will mortgages become more expensive? The five factors that Lagarde is already assessing to stop rate hikes

The Euribor has become a sleeplessness for millions of mortgaged. Month after month, with each rate hike announced by the European Central Bank (ECB), the millions of citizens who bought their homes with a loan referenced to this index see how their installments become more expensive. The end of July has left the Euribor at 4.15%, a new maximum since 2008.. and a new increase in the cost of mortgages that further strangles domestic economies.

“The forecasts we handle indicate that August will be the month in which it manifests itself in a first drop in the Euribor. From that moment on, the trend will be stagnation at levels of 4%, with a downward trend until the end of the year”, they explain from the Association of Financial Users (Asufin). “The Euribor rises at the rate that the rates do interest rates, so if there is a stoppage in these, the Euribor curve will flatten immediately”, adds the director of iAhorro Mortgages, Simone Colombelli, who also contemplates, however, the “risk that, if the interest rate rise continues, the Euribor reaches 5%”.

Other analysts speak of this more pessimistic line: “A change in trend is unlikely in the short term, there is a general expectation of more increases from the ECB and the past shows that interest rates can grow months after the last rate hike”, says Mónica Pina, head of the fintech Raisin in Spain, who justifies her position that “some banks have not yet passed on all the rate hikes of the last year to their clients.”

What will happen from now? The ECB went on vacation in August after raising rates in July by 0.25 points and thus adding nine increases that leave the reference rate at 4.25% (after six years at 0%). The president of the organization, Christine Lagarde, made it clear last Thursday that all the figures and numbers will be relevant to the decision made at the next meeting in September, but she opened the door for the first time in a long time to a pause in the increases.. Are interest rates already approaching the optimal level?

These are the factors that could encourage the ECB to end rate hikes.

1. GDP grows…. but Germany does not raise its head

Eurostat registered this past Monday an economic expansion of 0.3% in the second quarter for the euro zone. Good news after the slowdown in the previous winter quarter that left the euro area in recession, but good news with many nuances. Ricardo Amaro, an economist at Oxford Economics, warns that the rise would almost disappear if the rise in Ireland (3.3%) was excluded; Without that country, GDP growth would be limited to 0.1%. “This confirms that the eurozone economy remained slow and with risks of stagnation,” Amaro points out.

“We must not forget either the stoppage of economies as powerful as the German or Italian”, they explain from Asufin. And Germany announced zero growth (0%) last Friday, despite the fact that analysts expected a positive rate after having entered a technical recession in the winter months. As the continent's economic locomotive, it is often said that “when Germany coughs, the European Union catches cold”, so Lagarde may be motivated to end rate hikes so as not to further damage economic growth on the continent.

2. The mortgaged are at the limit

The rise in reference interest rates decreed by the ECB has a direct effect on the loans that banks offer their customers: if it is more difficult for entities to finance themselves, that cost is later transferred to their loans (and the mortgage is the most relevant to the banking business).

The rise in the Euribor to 4.15% affects some four million Spanish households with variable-rate mortgages. “With variable mortgages at maximums, we urge entities to favor the application of relief measures to guarantee that those with mortgages can weather this situation,” they ask from Asufin.

But the problem of facing the rise in the mortgage (in some cases it even doubles the installments that were paid before the takeoff of rates in 2022), is not only limited to the family sphere. As the budget tightens due to the increase in mortgage prices, families stop consuming and investing, which causes a suffocation of national demand and, therefore, of the economies. So the 'noose' that interest rates exert on the mortgage may end up breaking if Lagarde tightens it too much.. and cause a collapse of the European economy.

3. Inflation is coming down now…

The escalation of interest rates that the world's central banks have been undertaking for two years to contain the inflation triggered by the energy crisis derived from the war in Ukraine has been having a positive effect on prices for months. By making the price of money more expensive, the investments of companies and the consumption of citizens cool down. And this helps to lower prices, which is what the Fed and the ECB were looking for.

This Monday it was learned that inflation in the euro area has dropped to 5.3% in July, two tenths less than the previous month, thanks to cheaper energy. This is good news for citizens and for Lagarde, who sees that her monetary policy is working and could encourage her to end credit tightening in the eurozone.

4. … but the underlying rate is still high

“The underlying rate remains the trouble child for the ECB,” says Ulrike Kastens, an analyst at DWS. And it is that the ECB may not be looking at the general inflation rate of the countries, but the underlying one, which does not include energy prices or raw materials in its calculation and, therefore, takes a more precise picture of the real impact of the increase in prices by dodging energy fluctuations. The underlying, in this case, continues without yielding and this Monday it was known that it remains at 5.5%, above the general level for the first time since 2021.

“In the case of food, the annual increase in prices continues to be 10.8%, an increase that is too strong, which places a burden on family budgets,” Kastens concludes.. “In our opinion, the inflation data for this Monday is not yet an indication of why the ECB should not raise key interest rates in September.”

5. Financial institutions and states —through bills, bonds, and obligations— better remunerate the money of large investors, so a higher interest rate will attract more capital thirsty for better remuneration.

In recent months, the dogma has been installed that the ECB's decisions, which are usually announced on Thursdays, are 'followers' of those taken the day before, on Wednesdays, by the US Federal Reserve (Fed).. The chart above shows this and the reason is clear: to prevent a widening gap between US and European rates from driving away capital to the other side of the pond to be better paid.

“It is possible that the Fed will pause from now on to see the effect that the strong cumulative rise in interest rates in the last fifteen months has had on the US economy,” says Alfredo Jiménez, from the Spanish Institute of Analysts.. Lagarde, in this case, could act in two ways: one, raise the rates by 0.25 points if Jerome Powell, his Fed counterpart, also decides to do so on September 20; or two, should Powell pause raising, the ECB chief may want to narrow the gap further – now a percentage point – to improve the attractiveness of European capital markets.