The consequences of the ECB’s new rate cut lead to the fifth consecutive daily drop in Euribor, which stands at more than 2.7%, very close to the annual lows. The president was careful not to give any clues about future movements, but the market, experts and Euribor itself are convinced that the fall in rates will not stop in the coming months. At least until the summer, they see clearly that the ECB will make budget cuts at every meeting. Good news for mortgages. But it is also true that they already see the end of the falls.
The big question regarding Euribor is very clear. Where and when will his fall stop? And things are starting to become clearer. The mortgage index is linked to official ECB rates. HASThere is currently around a 50 basis point gap between Euribor and the deposit rate, which fell to 3.25% yesterday.. The mortgage benchmark works as a leading indicator of the ECB’s movements, but ultimately its fate will be determined at the end of the rate cut cycle.
The floor for rate cuts and, by extension, Euribor already has a fixed dateeven the levels where they can land. Many Euribor and futures market analysts are currently looking at the end of the cycle at the end of 2025 and with a high degree of coincidence. Something that didn’t happen last year.
Since the end of 2023, the market has priced in a brutal reduction in central bank interest rates. Nobody saw them. Neither the central banks themselves, nor the experts for excellent economic health. But the economy is starting to fail. More precisely, employment. And now there is alignment for the significant reduction of interest rates by central banks, and in particular by the ECB.
Lagarde once again dressed in arcane, but there were several details that sent rate expectations below 2%. Yesterday’s cuts were weeks in the making, but in September the ECB’s message was one of pause, so the developments caused the institution to change pace. Another reason is that the ECB finds it difficult to change rates without having growth and inflation forecasts.. Yesterday was not expected, the outlook will not be published until the end of September.
Experts and traders focus on the OIS model of financial swaps which reflects investors’ hedged positions against interest rate fluctuations. It is a very good indicator because around billions of dollars move depending on the ECB’s movements and it is closely followed by analysts and the central banks themselves. The system provides for a reduction per session until the summer, which should bring rates back to 2% and adds that at the end of 2025 an additional reduction so that they remain above 1.75%.
Wall Street expects sharp declines in 2025
The funny thing is that now it is the analysts who see rates still at levels lower than those of the market. For months, it’s been the opposite. “Yesterday’s ECB meeting marked the start of an era of consecutive easing, although Lagarde continued to describe the process as data-driven and meeting after meeting. Today, a cycle of rapid cuts is the subject of consensus”, comments Bank of America, one of the central banks. the largest investment banks on Wall Street. The company expects a floor rate of 1.5% at the end of the year.
They are not the only ones. Other banks like Citi or ABN Amro are also seeing rates at this level. However, the consensus collected by Bloomberg places rates at the end of 2025 above 2%. The most aggressive analysis companies are those who see the European economy blocked and in difficulty.
For Euribor, this represents a large margin of further decline for next year. Index futures, another way for investors to secure their positions, also point to an index below 2%. Specifically, three-month contracts, expiring in December 2025, are quoted at 1.855%.
Seventh month of autumn
The Euribor is preparing to close this month of October above 2.75%. Mortgage reviews are carried out with the monthly average. This will be the seventh consecutive month of decline. And it will lead to the biggest reduction in mortgage repayments since the Euribor decline began last year.
To see it with an example, for a real estate loan of 140,000 euros over 30 years (360 months), with a differential of 1% and taking the month of October 2023 as a reference (since most real estate loans are revised at 12 months), when the Euribor closed at 4.16%, the monthly payment was 765.30 euros.
From now on, with the provisional average for October 2024, which amounts to 2.759%, the mortgage payment of owners who have a revision in September will drop to 617.62 euroswhich means they will pay 147.68 euros less than a year ago and the first reductions in monthly mortgage payments will begin to be felt.
