Today, the European Central Bank will very likely decide on a reduction in key interest rates. The mortgage debtor cannot yet breathe a sigh of relief, because inflation may accelerate again.
FRANKFURT Today, Thursday, is a big day for mortgage debtors. The European Central Bank is likely to lower key interest rates for the first time in nearly five years.
Interest rates were at zero for years. Over the past two years or so, the European Central Bank has raised them by notches.
The main interest rate, i.e. the commercial banks’ deposit rate, is currently exactly four percent. It has never been as high in the history of the euro.
Above all, slowing inflation speaks in favor of lower interest rates. As recently as last June, consumer prices rose at an annual rate of 5.5 percent. In April, inflation had already slowed down to 2.4 percent.
However, right under Thursday’s meeting, clouds have appeared in the sky.
In May, inflation picked up again to 2.6 percent. Core inflation adjusted for food and energy prices, closely monitored by central bankers, was 2.9 percent.
The ECB’s goal is to achieve two percent inflation in the “medium term”. For a while it seemed to be close to its price stability goal, but in May there was a setback.
The goal of price stability is still quite far away.
Credibility in play again
Several central bankers, i.e. ECB Council members, are anticipated the June interest rate cut in recent weeks, also the CEO representing the Bank of Finland at the meeting Olli Rehn.
It follows that if the interest rate cut does not suddenly happen now, the central bank’s credibility would suffer after the comments of its leaders.
In practice, the interest rate reduction is already priced into the reference interest rates of current mortgages. As a result of the central bankers’ speeches, the market expects that the ECB will lower all three key interest rates by 0.25 percentage points on Thursday.
If it doesn’t do that, the mortgage reference rates would immediately rise again.
What is interesting now is what will happen to interest rates next. The interest rates for the rest of the year look very uncertain.
Interest rate decisions in the second half of the year are primarily influenced by two things: how consumer prices develop and how the euro area economy recovers.
The forecast tells about the future of interest rates
The ECB’s assessment of the future of the economy, which will be published on Thursday, is at least as essential information as the interest rate cut in terms of mortgage interest rates.
Future interest rate cuts can be deduced from that. If inflation slows down quickly, there may be several interest rate cuts this year. Some economists also warn that prices may also start to rise again.
Inflation may surprise in the coming months, especially due to the rise in wages. Germans in particular have received large salary increases. The war in Ukraine and geopolitical tensions may cause disruptions in the energy and food markets, which will accelerate inflation.
Inflationary pressures are also caused by huge investments in the energy transition – for example wind power and the hydrogen economy – and the reconstruction of Ukraine.
Finland needs more interest rate cuts
A large number of economists who follow the ECB are waiting for Thursday “hawkish” interest rate reduction. In practice, the ECB would therefore lower interest rates, but at the same time signal that the withdrawals would not continue.
Almost a third of Finnish households have a mortgage. Euribor is used as the reference interest rate for loans.
These market rates change when the financial markets anticipate the central bank’s future policy rate changes. If the ECB signals that interest bills will stop here, Finns’ debt service costs tied to short-term reference rates will not decrease, at least in the near future.
Guide interest rates guide the economy broadly. When the ECB cuts interest rates, for example OP or Nordea get money from the central bank at a lower price than before and can then borrow money themselves at a lower price. This generally increases household consumption and business investment, which are needed for economic growth.
The Finnish economy has plowed deeper than the economies of many other euro countries, so in Finland the interest rate cut would also be needed more urgently from the point of view of the general economy than elsewhere.