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• The one-year Euribor has registered its largest daily correction of 2024 in July

• The major central banks are reversing the cycle of rate hikes

• The mortgage rate will continue to fall this year and will fall below 3% in 2025

Author: Carlota G. Velloso

Source: El Economista 08/04/2024

The Euribor has been on a downward trend for four months. In July, the relief in the indicator, to which thousands of mortgages are linked, was confirmed again. In the daily data of the one-year Euribor, a new correction could already be anticipated, since the reference touched 3.39% on July 31, the lowest figure in 16 months. A first rate cut by the European Central Bank (ECB) in June and the expectation of another drop in September have led to this cooling.

Throughout the year, the one-year Euribor has been wavering along with expectations of rate cuts. The year began with excessive optimism, as Christine Lagarde was expected to start monetary easing in March and the body would undertake six cuts throughout 2024. Little by little, these prospects cooled until it was confirmed that the prospects had gone too far.

The Euribor lost its way and, although it began to fall from the end of 2023, in February of this year it changed course again and resumed rising. March was the last time that the indicator rose from one month to the next, as the ECB then committed to lowering rates in June. The path to lowering the mortgage rate was clear and was finally smoothed out by the central bank's action that month.

Now in July, expectations seem to be settled and in line with the ECB's calculations, which allows the Euribor to fall, leading to its biggest year-on-year fall in 11 years. The indicator has gained momentum in its decline and the daily data also reflect this. From July 24 (3.528%) to July 25 (3.481%) the Euribor fell by 0.047 percentage points and, from July 25 to 26 (3.426%) by another 0.055 points. In total, it is a drop of 0.102 percentage points in just two days.

This reduction of 0.055 points from one day to the next has not been seen since April 2024, which marks the two occasions in the year in which the indicator has corrected more in just 24 hours. Such a pronounced fall is not common, since to find a greater daily drop you have to go back 19 months, to February 1, 2023, according to data from iAhorro.

It seems clear that now the mortgage rate has ended up heading resolutely down the path. These more pronounced declines began on July 24 and continue at the start of August. In this seven-day period, the reference has gone from 3.528% in its daily rate to 3.32% on August 2. The difference is 0.208 percentage points. It has been eight months since such a correction was seen.

The figures reflect that the market is already discounting an unrestricted easing cycle. The first step was taken by the ECB in June, yesterday the Bank of England (BoE) joined in with the first cut of the cycle and this week the Federal Reserve (Fed) has hinted that it will join its counterparts in September. In other words, the main central banks of the West are at the point of reversing the vertiginous rise in rates.

The Fed is the body that leads the way in monetary policy. This week there has been a change of tone, in which the institution has shown some concern about the economic deterioration. In the document from the meeting on Wednesday it not only mentioned inflationary risks, but also possible tensions in the labour market. This is the first time in this cycle that the Fed has made reference to its dual mandate, price stability and full employment, which is interpreted as a sign that it is already preparing to take a first step in September.

Furthermore, the latest macroeconomic data have only reinforced this approach, since the effects of monetary restriction are visible in employment and activity. The latest report on the labour market in the United States, published on Friday, confirms the deterioration in employment and the rise in unemployment.

Euribor below 3%?

The most recent data provided by the National Institute of Statistics (INE) on mortgages registered in Spain show the impact of the Euribor on the demand and granting of credit. In May, 27,435 mortgages were signed, 18.2% less than in the previous year. It is logical that these operations fall when financing is more expensive and vice versa.

The big question that families are asking themselves is how the indicator will evolve and how much more it can fall. Euribor futures, which function as a leading but not definitive indicator, help to give an idea. Currently, they indicate that the mortgage rate will be at 3.04% in December. That is, the Euribor will end the year slightly above 3% and will fall below that level in January 2025.

Two weeks ago, futures