Inflation continues to hold no respite and the European Central Bank (ECB) is preparing to raise rates again at its next meeting scheduled for February 2. Analysts contacted by i expect an increase of 0.5%, the same as in December.
This new interest rate hike will affect Euribor rates, which will also rise, making credit more expensive, increasing the value of monthly mortgage payments, for example. A situation that will also affect anyone who is thinking about applying for a loan.
According to the simulations made by the platform for oi CompareJá.pt, for a property worth 125,000 euros to be paid over 33 years, if the installment had been set at the beginning of the year at 366.15 euros (with an average interest rate of 0.87%), it already increased in November to 503.16 euros (average interest rate of 3.08%) and in February it will rise to 538.42 euros, combining the interest with the expected increase of 0.5%. That is an increase of 35.36 euros per month, but 172.27 euros more compared to February.
As for a property worth 186,000 euros, payable in the same period (33 years), if it paid 540.51 euros in January, the installment increased to 748.71 euros in October. With this interest rate increase, you 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 repeats itself for a house worth 257 thousand euros, also payable up to 33 years. The installment amount, which amounted to EUR 799.15 in February, rose to EUR 1096.96 in November this year. If that 0.5% increase continues, 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 this year.
With a rising reference interest rate, all other rates, such as the Euribor, will of course also be affected. Henrique Tomé recalls that, in Portugal, “since more than 90% of home loans have variable interest rates, household purchasing power will fall again”.
An opinion shared by Paulo Rosa, economist at Banco Carregosa. “Those who have loans indexed to Euribor rates at three and six months will still receive upward updates to their contract within the renewal period with some certainty.” But not all is bad news, as he believes it is likely that home loans linked to the 12-month Euribor will already have some relief in 12 months, i.e. January 2024, from currently observed values.
Ricardo Evangelista, an analyst at ActivTrades, also admits that “for those paying variable rate loans, the impact will be negative as Euribor rates will follow the rise”, meaning higher mortgage payments.
According to the analysts contacted by the agency, the opinion is unanimous: “If the ECB goes ahead with the expected increase, the reference interest rates will move towards the 3% level, and there are still expectations for further increases during this year”. says XTB analyst Henrique Tomé. And the calculations are simple: “Interest rates are expected to rise further in the first half of this year. However, it is also expected that from the 1st quarter of the year, the size of these increases will be smaller than the previous decisions”.
The official admits that while inflation remains high, he acknowledges that signs are beginning to appear that the peak may already have been reached and therefore points out that interest rate hikes should not be expected as aggressively as those recorded over the course of 2022. .
“Following the decision of the ECB meeting in February, it is expected that the new rate hikes can be revised downwards, we will eventually see increases of ‘only’ 25 basis points at the next meetings, if inflation continues to show signs of slowing down. show”, he refers to 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 another rise at the May 4 meeting, but of only a quarter percentage point. point. “The market also expects an increase of more than 25 basis points in the coming summer, ending the year of increases with an overall increase of more than 150 basis points, or 1.5 percentage points. Therefore, currently expected final rates would be 3.5% for the ECB deposit rate, 4% for the reference rate and 4.25% for the provision of liquidity”.
“However, the market also expects some interest rate cuts of 25 basis points at the end of the year,” he added.
Enough to keep inflation under control?
For Henrique Tomé, these rate hikes serve to cool economic activity so that inflation can be controlled and the impact of these measures is not always immediate, as observed in Europe and also in the US. And therefore 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 certain sectors, such as the services sector, that continue to show signs of inflationary pressures and that it is therefore too early to draw definitive conclusions about the measures taken so far. taken by the ECB”, recalling that the body was one of the major Western banks that took the longest to raise interest rates (not counting the Bank of Japan) and as a result inflation in Europe only recently started showing signs of show delay.
Banco Carregosa’s economist recalls that inflation is mainly supply-side and is largely driven by energy prices, especially natural gas, and by food prices, increases due to the war in Ukraine. However, he warns that wage substitution threatens price stability. And he gives as an example the minimum wage in Germany, which has risen by 22%, “intensifying pressure on inflation, particularly on the underlying consumer price index, which excludes food and energy,” recalling that “German inflation is just that which weighs most heavily on the ECB’s decisions, allowing it not only to postpone a rate cut, but also to fuel it”.
As for the central bank’s work, Paulo Rosa says the ECB is doing its job, “trying to halt the highest inflation in recent decades, even if it is initially on the supply side, putting them at increased risk runs from culminating in a recession, this energetically restrictive monetary stance of the Eurozone central bank. In addition to his work being called into question by Germany’s inflationary remuneration policy.”
Ricardo Evangelista is more optimistic when he guarantees that interest rate hikes have contributed to a slowdown in inflation. He does, however, draw attention to the fact that aggregate values remain well above the 2% target, and so-called core inflation, which excludes energy and food commodity prices, has not yet begun to decline. “This scenario makes it possible to foresee the continuation of interest rate hikes, at least at the next two meetings in February and March”, he has since acknowledged that everything will depend on the behavior of inflation and also on economic growth, which in his opinion “is difficult to predict at this point.”
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