Making predictions for the evolution of monetary policy is always a risky exercise. This year even more so, as the uncertainty is very high, with the central banks hostage to the evolution of inflation.With the rise in prices with no signs of letting up, the central banks are raising interest rates at the fastest pace this century. A policy that is tightening the budget of families, already penalized by the sharp rise in the cost of living. The European Central Bank raised interest rates by 75 basis points last week (0.75 percentage points), putting the deposit rate at 1.50%. Within three months, increased the interest rate by a total of 200 basis points and it is almost certain that it will not stop there. In December, an increase of at least 50 basis points is expected. You markets point to a terminal rate of around 3%, while economists are more restrained, estimating that the ECB will complete the cycle of aggravation when the deposit rate reaches 2.50% in the first half of 2023. Bearing in mind this perspective, it seems out of place to speak of a peak in Euribor rates. However, markets have already anticipated this tightening of monetary policy and, looking at the index with a maturity of 12 months, is already in line with the maximum level at which investors expect the ECB to place interest.THE Euribor 12 months it is at 2.673%, and it is foreseeable that it will now park in the range between 2.5% and 3%. After one worsening of more than 300 basis points since the beginning of the year, it is not too risky to say that, in this period, the cycle of strong rises has already come to an end. In the indexes with shorter periods, the upward trend still has room to continue. THE Euribor 6 months is at 2.198%, so should continue to increase over the next few weeks. At Euribor 3 months, which is usually close to the current ECB rate, the way to go is even wider. It is currently at 1.726%, so we may have a increase of more than 100 basis points.Euribor rise since the beginning of the year12 months: 317 basis points 6 months: 274 basis points 3 months: 230 basis pointsDistance to 3%12 months: 33 basis points 6 months: 80 basis points 3 months: 127 basis points
ECB pressured to slow down…
At last Thursday’s meeting, the ECB made the second consecutive rise of 75 basis points, but signs that it will have been the last “jumbo” increase. Pressured by the slowdown in the economy, and with the interest rate approaching a neutral level, the monetary authority now has a more limited margin for aggressive interest rate hikes.In addition, if up to now, decisions have been consensual, pressures are now beginning to emerge for a easing of monetary policy tightening: in the Governing Council and also among European politicians, highlighting the statements made by French President Emmanuel Macron, accusing the central bank of worsening the prospects of recession in the European economy. raising interest rates had a strong impact on the markets last week, with shares and bonds to appreciate sharply.In the interbank market, the Euribor at 12 months recorded a sharp decline of 10 basis points on Friday, completing a cycle of five sessions in fall. It stood at 2.567%, already more than 20 basis points below the maximum since 2008 set on October 21 (2.778%).
…but inflation still rising and GDP continues to grow
Earlier this week the situation was reversed, showing how the perspectives can change quicklydepending on economic data. The 12-month Euribor jumped 6 basis points this Monday and registered an identical increase on Tuesday, erasing more than half of the fall it had recorded in the previous five sessions. The 6-month Euribor reached a new high since 2009 this Wednesday after an accumulated rise of 16 basis points in three days. The rise in Euribor rates in recent sessions is explained by the indicators revealed by Eurostat on Monday. The European Commission’s statistical office revealed that the Inflation in the Eurozone has reached a new all-time high, which represents a strong setback for those who estimated that the peak had already been reached. The consumer price index grew at an annual rate of 10.7% in October, well above the September record (9.9%) and the economists’ expectations (10.3%). Eurozone GDP grew 0.2% in the third quarter. Although it represents a pronounced slowdown compared to the second quarter (0.8%), it indicates that the Eurozone is not yet in recession.With Eurozone inflation showing no signs of easing and the economy showing signs of resilience, the ECB runs out of arguments to slow down the pace of interest rate hikes. The pressure that has been exerted by several European politicians for the ECB to suspend the cycle of interest rate hikes is also decreasing. On the other hand, analysts continue to consider that it will be unavoidable for the European economy to suffer a recession in 2023, mainly due to the gloomy prospects for the German economy, heavily punished by the intensity of the energy crisis plaguing the country. A trend that will hardly allow the ECB to place the deposit rate above the maximum level that economists and investors are currently estimating (between 2.5% and 3%).
Credit installments to go up
More than the daily variation of the Euribor, for households with mortgage loans, what matters most is what the ECB’s terminal rate will be. It’s still a mystery, but will hardly double the current level (1.5%).For those who have a loan linked to Euribor 12 months (index for most contracts signed in recent years), the good news is that this rate should not go up much more. If the benefit has been revised recently, next year it should not deteriorate substantially. If the review takes place in one of the next months, expect a very pronounced increase, but it should be the last of a relevant dimension. is now paying an installment of around 860 euros, which represents a increase of 70% compared to October last year. When the installment is reviewed again, in October 2023, the installment will rise to 920 euros (if Euribor remains at current levels). This is an increase of 7%. In credit contracts indexed to Euribor with shorter maturities, the increases in installments have been less pronounced, but will continue over the next year. Simulate your case here. Taking into account the same conditions (credit of 200 thousand euros over 30 years, with a spread of 1%), but in a loan with an interest rate indexed to Euribor for 6 months, the revised installment in October increased by 30% to 800 euros. In April of the next year, if the 6-month Euribor is at 2.5%, the installment will increase by another 13% to 900 euros. Regardless of the contracted index, it is certain that the 1.3 million families Portuguese companies with variable rate mortgages will be in the second half of 2023 to pay an installment more than 50% above the cost they had in the first half of this year. The good news is that from that point on, the increases (if any) will not be considerable. Given current expectations, the ECB should complete the interest rate hike cycle in the first half of next yearthen keeping rates at maximums of more than 10 years due to the persistence of inflation above the target (2%) at least until 2024
Rate of Savings Certificates on the way to 3.5%
If the rise in interest rates is causing a headache for indebted households, for savers it reflects the the end of a long period in which the return on their savings was practically nilSavings Certificates are currently the most attractive guaranteed capital product. THE subscription in November guarantees a gross interest rate of 2.492%which, despite representing a negative real return, compares quite favorably with the interest rates that are being offered by banks (still at 0%).The return of this State savings product is directly linked to Euribor to 3 months, so it is to be expected that the profitability of Savings Certificates will continue to rise over the next few months. The interest rate is calculated taking into account the value of the index plus one percentage point. If the 3-month Euribor reaches 2.5% in 2023, the The gross rate of Savings Certificates will reach the maximum limit of this savings product, which is set at 3.5%.Also read: How to subscribe savings certificates? Born in 1977, he has been a journalist since 1999. He began his career at Jornal de Negócios, where he spent more than 20 years, occupying various roles, always focusing on online. He is currently an independent journalist, subscribes to the daily market newsletter Morning Call and collaborates regularly with ECO. Graduated in Management at ISEG, he has a special interest in everything related to the financial markets.