• Expectations of rate cuts by the central bank have widened

• With the change in forecasts, the indicator will close 2024 below 3%

Author: Carlota G. Velloso

Source: El economist 08/06/2024

The summer is being positive for mortgage holders, as the one-year Euribor marked its lowest level in 2024 in July and continues to fall at a good pace in August. With the recent scare that the markets have had, discounting the possibility of a recession in the United States, expectations of rate cuts have widened. The forecasts of a more lax monetary policy than expected a few days ago – the script is changing very quickly – favor the downward trend of the rate, to which thousands of mortgages are referenced.

Last month, the one-year Euribor closed at 3.526%, its fourth consecutive decline and a drop of more than one tenth higher than the figure for June (3.65%). In addition, if compared to what the same reference marked in July 2023, the year-on-year drop was the largest in 11 years. But not only the performance of the monthly figures stands out, but also the daily evolution of the indicator, which reflects that it has already set a clear downward path.

Just on the last day of July, the 31st, the indicator had marked its lowest daily figure of 2024, at 3.39%. However, the start of August has brought new records. In the four days of the month, it has moved in its daily rate from 3.349%, to 3.32%, to 3.328% and to 3.138% this Tuesday. The latest figure is not only the lowest of the entire year, but it is also the largest daily cut since December 2023, according to iAhorro. The difference is 0.1 points.

Around the same time but in 2023, the mortgage rate was around 4%. From one year to the next, the evolution is notable and the cut is around 0.7 points. At the moment, the one-year Euribor registers an average of 3.261% in August, which would confirm a further decline this year, although there is still a long month ahead.

What is clear is that the positioning of the markets plays in favor of mortgage holders. Last week, two more cuts of 25 basis points each were expected by the European Central Bank (ECB) for the remainder of the year, while today three are anticipated. That is, a relaxation of 75 basis points, according to the eurozone interest rate swap, Overnight Indexed Swap (OIS).

In the United States, forecasts for cuts by the Federal Reserve (Fed), the central bank that calls the shots in monetary policy, have changed even more aggressively. Four cuts of 25 basis points are now expected, while a few days ago, only three were expected and, if we go back a little further in time, only two, according to the CME Fed-Watch Tool. What happens on the other side of the Atlantic can influence the eurozone and if Jerome Powell steps on the accelerator of the cuts, that could benefit the Old Continent.

Since last week, investors have focused on macroeconomic data, looking for signs of weakness in the US. Doubts about a forced landing began to take shape, but with last Friday’s employment data, all the alarms ended up going off. Job creation moderated and unemployment rose. The debate now revolves around whether there will be a slowdown in the world’s largest power that will spread to the rest.

The adjustment in the markets has been such that Euribor futures have also moved. On Friday, the indicator was expected to close 2024 just above 3%. Now it is expected to break 3% in December and end at 2.935%. A year later, in December 2025, it would be at 2.2%.

There is still the month of August ahead, more macroeconomic data that the market will analyse and volatility. Expectations are changing very quickly. At the moment, in favour of the Euribor, but this trend has to be confirmed as more information on the state of the economy arrives.