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Inflation continues to give no respite and the European Central Bank (ECB) is preparing to raise interest rates again at its next meeting scheduled for February 2. Analysts contacted expect a 0.5% increase, the same as in December.
This new rate hike will have an impact on Euribor rates, which will also rise, making credit more expensive, increasing the value of monthly mortgage payments, for example. A situation that will affect anyone who is thinking of applying for a loan.
According to the simulations done for oi by the platform ComparaJá.pt, for a property worth 125,000 euros to be paid in 33 years, if the installment at the beginning of the year was set at 366.15 euros (with an average interest rate of 0.87%), in November it already reached 503.16 euros (average interest rate 3.08%) and in February it will rise to 538.42 euros, combining the interest rate with the expected increase of 0.5%. That is, an increase of 35.36 euros per month, but 172.27 euros more than in February.
As for a property worth 186,000 euros, payable over the same period (33 years), if in January he paid 540.51 euros, the installment rose to 748.71 euros in October. With this increase in interest you will pay an installment of 801.17 euros in February. That is, a monthly increase of 52.46 euros and an increase of 260.66 euros compared to February.
The scenario is repeated for a house worth 257 thousand euros, also payable in 33 years. The installment which in February was 799.15 euros rose to 1096.96 euros this November. If this 0.5% increase happens, you will pay a monthly installment of 1184.63 euros in February. After all, 87.68 euros more per month and an increase of 386.48 euros compared to the beginning of the year.
The Portuguese were punished
With reference rates rising, of course all other interest rates, such as Euribor, will also be affected. Henrique Tomé recalls that, in Portugal, “as more than 90% of mortgages have a variable interest rate, families will see their purchasing power decrease once again.”
A view shared by Paulo Rosa, economist at Banco Carregosa. “Those who have Euribor loans with three and six month interest rates will, for sure, have upward updates on their contract within the renewal period.” It’s not all bad news though, as he believes it’s likely that mortgages linked to the 12-month Euribor will already see some relief in 12 months, ie January 2024, from values seen today.
Ricardo Evangelista, analyst at ActivTrades, also admits that “for those paying variable rate loans, the impact will be negative as Euribor rates will follow the rise”, which will mean higher mortgage payments.
new increases
According to the analysts contacted by the agency, the opinion is unanimous: “If the ECB goes ahead with the expected increase, the benchmark interest rates will move to the level of 3% and there are still expectations for further increases during this year.” . says XTB analyst Henrique Tomé. And the calculations are simple: “In the first half of this year interest rates are expected to continue to rise. However, it is also expected that from the 1st quarter of the year the scale of these increases will be smaller than previous decisions.”
The official admits that while inflation remains high, he acknowledges that signs are starting to appear that the peak may already have been reached, and therefore says that rate hikes should not be expected to be as aggressive as those recorded during of 2022.
“Following the February ECB meeting decision, it is expected that new interest rate hikes may be revised downwards, we will ultimately see increases of ‘only’ 25 basis points in the next meetings, that is if inflation continues. to show signs of slowing down”, reports our newspaper.
Also Paulo Tomé, economist at Banco Carregosa, says the market expects a new high of more than half a percentage point at the March 16 meeting, followed by a new rise at the meeting scheduled for May 4, but just a quarter of a percentage point. “The market is also predicting an increase of more than 25 basis points next summer, thus closing the year of increases with a total increase of more than 150 basis points, or 1.5 percentage points. Therefore, today’s forecast terminal rates will be 3.5% for the ECB deposit rate, 4% for the reference rate and 4.25% for the liquidity provision.
“However, the market also expects some year-end interest rate easing of 25 basis points,” he adds.
Is it enough to control inflation?
For Henrique Tomé, these interest rate increases serve to relax economic activity so that inflation can be controlled and the impact of these measures is not always immediate, as seen in Europe but also in the US. And, therefore, it gives a positive note to the entity led by Christine Lagarde in these decisions. However, he acknowledges that “it is also important to note that there are some sectors, such as services, which are still showing signs of inflationary pressures and it is therefore too early to draw any final conclusions about the measures adopted so far by the ECB”. recalling that the body was one of the main western banks that was slow to raise interest rates (not counting the Bank of Japan) and therefore, in Europe, inflation only recently started to show signs of slowing down.
Banco Carregosa’s economist reminds us that inflation is mostly on the supply side and is largely driven by energy prices, especially natural gas, and food price increases dictated by the war in Ukraine . However, he warns that wage replacement is a threat to price stability. And he gives, as an example, the minimum wage in Germany, which rose by 22%, “intensifying pressure on inflation, especially the underlying consumer price index, which excludes food and energy,” recalling that “German inflation is precisely what weighs more heavily on the ECB’s decisions, and thus may, in addition to delaying interest rate easing, further fuel this rise.”
As for the central bank’s work, Paulo Rosa says the ECB is doing its job, “trying to stop the highest inflation in decades, even though it is initially on the supply side, thus running the increased risk of peaking into a recession, this energy-restrictive monetary stance of the Eurozone central bank. Besides the fact that his work is challenged by the German inflationary allowances.
Ricardo Evangelista is more optimistic when he guarantees that interest rate hikes have helped to slow inflation. However, it draws attention to the fact that overall values remain well above the 2% target and so-called core inflation, which excludes energy and food commodity prices, has yet to begin to fall. “This scenario makes it possible to predict the continuation of the rise in interest rates, at least in the next two meetings in February and March”, since then he acknowledges that everything will depend on the behavior of inflation and also on economic growth, which during his opinion, “it’s hard to predict at this point.”
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