Something is breaking in financing conditions in Europe. The collapse of the Euribor is gaining speed in the interbank market on the eve of the European Central Bank (ECB) publishing its projections for 2024 and once again ruling on the level of interest rates that will govern in the euro zone. The speed of decline is already similar to that recorded in February 2009, in the midst of a hangover of financial activity after the collapse of Lehman Brothers and the mortgage crisis, which caused a series of interest rate cuts by several central banks.
The 12-month Euribor recorded a daily reading of 3.727% this Thursday, which represents its eighth consecutive fall and extends the index’s downward trend to its lowest level since April, according to data consulted by ‘La Information’. Since hitting its annual high of 4.228% at the end of September, one-year interbank lending interest has plummeted by half a percentage point, spurred by expectations of interest rate cuts in the euro zone due to the collapse in the contracting of new mortgages, the deterioration of economic activity and disinflation that seems to meet the ECB’s objective.
The monthly average for December – which will act as a reference for the cost of variable mortgages – is now provisionally at 3.78%, 0.24 percentage points (24 basis points) less than that of November (4.022%) and 0.37 percentage points (37 bps) less than in October (4.16%) when it set the annual maximum of 2023 and, in turn, a level not seen since November 2008.
Despite the collapse of the daily price in the last two months, the Euribor will still continue to make mortgages more expensive in the next reviews of December, January and February, because the average is used (the sum of all the daily prices divided by the number of business days) for reference. In this case, the interannual differential still registers increases and will do so for at least three more months.
Despite this, the year-on-year increase (+76.5 basis points) is the smallest since April 2022 when the index turned positive for the first time in more than seven years. In January and February it is also expected to be positive. However, next March – which promised 3,647% in 2023 – this type of loan could finally become cheaper for the first time since December 2021.
The ECB, on the brink of offside
“The ECB’s hiking cycle appears to be over, but tightening shock waves will continue to shape the eurozone economy in 2024. Traditional delays in transmission are now accompanied by longer delays in average auto increases. “ga of interest, which could extend the impact of the adjustment. For the ECB, the risk of falling behind the curve for the second time in a cycle is growing,” explain Carsten Brzeski and Bert Colijn, economists at ING. They highlight in their report that it is now that average interest payments have begun to grow. now due to the effect of refinancing at higher rates and the greater presence of fixed rates on loans.
“Given that there is now such a discrepancy between the current interest rate and the average interest rate paid in the economy, the ECB could cut rates, but average interest payments could continue to rise. Therefore, if the ECB were to initiate process of reducing interest rates, part of the tightening effect would still be arriving through the process. This would cushion the effect on monetary flexibility,” they warn from ING.
Experts recall that the ECB is uncomfortable in this situation because governments continue to provide fiscal support to the economy, something that counteracts its aggressive rate policy. This is changing but in a moderate way. “This is not the first time that fiscal and monetary stances have been at odds: think back to the 2010s, when fiscal austerity countered the ECB’s efforts to bring inflation to 2%. Now this is working in the opposite direction, as Fiscal support boosts economic activity and therefore counteracts the ECB’s efforts to reduce core inflation,” Brezki and Colijn add.
Lagarde, on pole to cut rates
The forecasts for the ECB meeting on December 14 and its corresponding communication are about to acquire a prominent role in the markets, although the movement registered in the interbank market and the Euribor already anticipate changes. President Christine Lagarde is now weighing what room she has to resist market expectations of possible interest rate cuts at the start of 2024.
Rate futures point to a reduction as early as March and indicate that the main financing rate could fall to 2.5% by the end of 2024, that is, around 200 basis points less than now. If market predictions prove correct, the ECB would be the first among major central banks to take the step of cutting rates.
The dilemma faced by those responsible for European monetary policy is reminiscent of December 2021, when they delayed their movements while the Fed adopted a more aggressive tone and began rate hikes just three months later. It took Lagarde three more months to change his speech, the war in Ukraine had already started, and another four months to announce the first movement in the price of money in the eurozone, but already with inflation running out of control at around 10%.