Suspension of BCE interest rates: a vacation for Eurivore and house payments?

The European Central Bank (ECB) matched market expectations and broke its series of key interest rate hikes at its latest monetary council meeting on Thursday, October 26. After 10 consecutive rate hikes since the summer of 2022 to curb eurozone inflation, the ECB Council decided to keep the banks' refinancing rate at 4.5%, the highest since 2001, until a cut is decided. But what is the significance of this pause in ECB rate hikes for those who already have or plan to take out a mortgage loan? In fact, according to experts and analysts, interest rates on mortgages, mostly indexed to EURIBOR, will continue to rise, albeit to a lesser extent. That''is explained by the fact that, for the time being, no reduction in interest rates, which are the basis for mortgage lending contracts, is foreseen, as well as a significant improvement in bank financing conditions for families.

Moderate decline in inflation in the euro area

Signals of slowing economic growth caused by geopolitical uncertainty, as well as tighter bank financing conditions that exceeded expectations, explain the ECB's decision to keep three key interest rates unchanged at its Oct. 26 meeting. The Christine Lagarde-led regulator expects the effects of tighter monetary policy to be passed on to the economies so that inflation returns to the 2% target in the medium''rates adopted by the ECB Council continue to have a strong impact on financing conditions', which 'increasingly restricts demand, which helps to reduce inflation', they explained. It's worth noting that the refinancing rate is 4.5% (and will remain so), making mortgages, consumer loans and corporate loans more expensive.

What happens to EURIBOR and mortgage payments if interest rates remain unchanged?

Although the banks' refinancing rate remains unchanged at 4.5% until at least December (the date of the next monetary council meeting), analysts and market economists believe that the most likely scenario is that mortgage interest rates will continue to rise. Thus, at present''longer term will remain at 2008 levels and continue to make mortgage payments, which will be renegotiated in November, more expensive. However, these increases are expected to be smaller in scale as the upward trajectory of this rate slows.

Looking ahead to next year, EURIBOR could remain at current levels or even rise slightly. Forecasters at the Foundation for Economic Research (Funcas) expect the 12-month average annual EURIBOR rate to be 4.2% in 2024, 25 basis points higher than previously expected and higher than the 3.9% average annual rate projected for 2023. At the end of next year, analysts expect EURIBOR to remain at around 3.5%, although further developments will depend on inflation data and decisions''ECB monetary council.

In addition to high EURIBOR rates, conditions for access to mortgage lending in the euro area should remain restrictive, leading to a fresh drop in demand for the final 2023 quarter. In its latest survey of banks in the third quarter of 2023, the ECB concluded that banks have tightened conditions for accessing credit for home purchases more than expected. "Banks are increasingly worried about the risks their customers face and less willing to accept them," explained Christine Lagarde. There was also a "sharp decline in demand for credit in the third quarter" due to higher financing rates and associated cuts in investment plans and home purchases, she added.