ECB heads for 4% in June as Euribor lags behind

ECB heads for 4% in June as Euribor lags behind

The European Central Bank is expected to raise interest rates by 0.25 points at its June meeting, which would take the official price of money to 4%, according to the signals from the debate. The decision comes with eurozone inflation still at 6.5% and core inflation showing no signs of easing, based on the market data available. The move was already priced in, but that does not make it consequence-free: every tenth of a point that Euribor rises makes variable-rate mortgages more expensive and, along the way, shows that monetary policy is moving at a different estimulante ilegal than many households and businesses can withstand.

The conversation the announcement has sparked in economic circles is less about whether the ECB will raise rates and more about how far it will go and what effects it will have in a context of stagflation. Germany has already entered a technical recession with inflation close to 8%, a combination that complicates the roadmap for the institution led by Christine Lagarde. The question hanging in the air is whether the ECB has room to keep tightening or whether it will instead be forced to ease off sooner than expected.

Euribor is not trinc the script

One of the most striking points in the debate is the gap between what the ECB does and what Euribor reflects. With official rates heading towards 4%, the benchmark index for variable-rate mortgages should be moving around 4.25% or 4.5%, according to a calculation circulating in the debate. Yet Euribor has lagged behind, an anomaly that some attribute to market intervention and others explain by the expectation that the rate-hiking cycle is nearing its end.

The result is that mortgage holders who review their loan in June will face a notable increase, but a smaller one than would be expected if Euribor faithfully mirrored monetary policy. Every 100,000 euros of outstanding debt means roughly 3,700 euros more per year with a review at 3.7%, according to a calculation circulating in the debate, a figure that squeezes household budgets and, in many cases, forces cuts to spending on items such as holidays.

Deposits at 0% and triple-A bonds at 4.5%

While rates rise, bank deposits remain sluggish. Spanish banks keep offering token returns, around 0% or even less, even though the official price of money is approaching 4%. The official explanation is that banks do not need to attract deposits because they have plenty of liquidity, but the less charitable reading is that they are using the cycle to widen their margins at savers' expense.

The alternative does exist: triple-A fixed income at 4.5% in international markets, as noted in the debate. Those who do not look for it, one part of the analysis argues, cannot blame the bank alone. Foreign banks offer more competitive products, but inertia, lack of knowledge or the comfort of keeping everything in one institution hold back the mobility of Spanish savings. A classic.

Stagflation: the scenario that complicates everything

The macroeconomic picture does not help. The eurozone is growing weakly and core inflation remains out of control, drawing a textbook stagflation scenario. Historical experience says that in these episodes central banks cannot relax monetary policy even if the economy cools, because the risk of unanchoring inflation expectations is too high.

Comparison with the United States is inevitable. The Federal Reserve appears ready to pause in June and resume hikes in July up to 5.5%, with inflation at 5.5%, according to the signals from the debate. The eurozone, with higher inflation and more fragile growth, has less room to pause. The ECB is the central bank keeping rates lowest in all of the West, a position some consider unsustainable in the medium term.

The impact on public debt

Rate hikes do not only affect mortgages. States also finance themselves at higher rates, and the mountain of accumulated public debt turns every tenth of a point into a budget problem. The United States has 35 trillion in debt and a significant portion matures in the coming years, which will have to be refinanced at far higher rates than the originals, as noted in the debate.

The question that arises is how long this balance can hold. If rates stay high for years, the cost of debt can soar and force spending cuts or tax increases. If they are lowered too soon, inflation may rebound. There is no painless solution.

Guindos's view and the future of rates

The ECB's vice-president, Luis de Guindos, has made clear that the era of low and negative rates will not return. "In the next three or four years, rates will be in an environment of relatively positive levels", he said. It is a warning to sailors: anyone expecting a return to cheap money is mistaken.

The discussion over whether 4% will be the ceiling or whether rates will need to go higher remains open. Some analysts argue that 4.5% will be the peak because recession will force a stop. Others believe rates will stay high for years, even above 5%, to bring inflation to heel. Time will tell who is right, but for now the labour market holds up and inflation is not easing at the desired pace.