# What ECB rates should we assume when deciding to fix or not?



## Brendan Burgess

I am not able to forecast ECB rates and I don't think anyone else can either. No one forecast rates of 0% lasting for a few years. 

This century, peaks have been hit as follows: 
2000:  4.75%
2008:  4.25%

But for most of the time, the rates have been a lot lower


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## Brendan Burgess

When rates are rising as they are now, we tend to think that they will continue to rise and stay up.

And people will tell you that they remember mortgage rates of 15% back in the early 80s (?). 

The ECB rate is now 2%. 
It will probably rise over the next few months to 3%. 
But will come down after that. 

Is 2% a best guess of the medium-term and  long-term average of the ECB rate? 

Brendan


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## Zebedee

You could look at German bond yields to give a rough idea. Current 10 year rate is just under 2pc.


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## Sarenco

Average 30-year fixed rate mortgages in the US are now over 7% (they have doubled over the last 12 months).

The Fed is obviously ahead of the ECB in the tightening cycle but it might give some guide as to where mortgage rates could end up over the next year or so.


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## NoRegretsCoyote

Sarenco said:


> The Fed is obviously ahead of the ECB in the tightening cycle but it might give some guide as to where mortgage rates could end up over the next year or so.


I agree that cyclically the US is ahead of Europe.

But structurally I think rates are just lower in Europe for a few reasons including an older population.

The French ten-year rate (red) has been below the US ten-year rate (blue) for most of the last decade, often by quite a margin.


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## ArthurMcB

Sarenco said:


> The Fed is obviously ahead of the ECB in the tightening cycle





NoRegretsCoyote said:


> I agree that cyclically the US is ahead of Europe.



Can i just check what you guys mean by this please?


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## NoRegretsCoyote

Brendan Burgess said:


> And people will tell you that they remember mortgage rates of 15% back in the early 80s (?).


I think Ireland is now part of a monetary union which has credibility to tackle inflation. Interest rates won't ever have to rise to double digits as inflation won't be allowed to get there.



Brendan Burgess said:


> The ECB rate is now 2%.
> It will probably rise over the next few months to 3%.
> But will come down after that.
> 
> Is 2% a best guess of the medium-term and long-term average of the ECB rate?


No one knows, but it's useful to think about the *real interest rate*, which is the interest rate less inflation. In Europe money has been basically free for years as inflation has been higher than the risk-free rate. This is pretty much unknown in human history. Will we see this again? I don't know.


No one can make accurate predictions. As a consumer all you can do is pick the best rate at any given time for your needs.


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## Sarenco

ArthurMcB said:


> Can i just check what you guys mean by this please?


A tightening cycle basically refers to a cycle of interest rate hikes.


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## Brendan Burgess

NoRegretsCoyote said:


> No one knows, but it's useful to think about the *real interest rate*,



Hi Coyote, in general that is useful.

But my specific context is regarding mortgage rates. 

Brendan


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## cremeegg

Brendan Burgess said:


> Hi Coyote, in general that is useful.
> 
> But my specific context is regarding mortgage rates.
> 
> Brendan


I agree with Coyote here. Real interest rates have fallen this year. We had interest rates at 0% and inflation at 2%, now we have inflation at 9% and interest rates at 2%.

That is a significant fall in real interest.

Specifically mortgage rates for trackers and most variables have risen 2%. Theoretically the comparator is inflation, in reality wages are more relevant for most people. These have risen in the region of 6% in that time, the minimum wage by 7% and I suspect higher earners wages by at least as much.


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## Brendan Burgess

You are missing the point of the thread entirely. 

If someone is facing a decision whether or not to fix their rate, what assumptions should they make?  

Brendan


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## Savvy

Between 2 and 2.5% for the refinance rate - this is the neutral rate according to online commentators/central bankers.
To me this would be a decent approximation to the rate.


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## Sarenco

Savvy said:


> Between 2 and 2.5% for the refinance rate - this is the neutral rate according to online commentators/central bankers.


The ECB refi rate is already 2%.

I would be surprised if that doesn’t at least double over the next 12 months.

Beyond that?  Who knows.  I’m afraid my crystal ball is playing up.


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## Savvy

We are talking about long term, yes they will peak , probably over 3% in the fight against inflation but then will likely come down later

But you are right that even with a Crystal Ball we would probably get it wrong.

*From the Washington Post yesterday:*
The ECB’s main deposit rate could peak early next year at 3 percent, up from 1.5 percent now, wrote Jack Allen-Reynolds, senior Europe economist at Capital Economics in London, in a client note on Wednesday. Other analysts expect the rate to peak somewhat lower, around 2.25 percent.

On such small percentages (2.25% vs 3%) a difference of 0.75% just shows how difficult even the short/medium term rates are to forecast.


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## Paul F

Brendan Burgess said:


> If someone is facing a decision whether or not to fix their rate, what assumptions should they make?


Are you talking about somebody who is currently on a tracker? Or somebody who is on a variable or fixed rate and is thinking of (re-)fixing?

Because it seems that the main banks' fixed rates are not very correlated with the ECB rate. Edit: neither are their variable rates.


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## Brendan Burgess

@Paul F 

It could be any of those three categories.

Agree that the fixed rates don't seem very correlated. But we have seen increases in the fixed rates and I am sure we will see more soon.

Brendan


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## Sarenco

Is the idea is to formulate a rule of thumb as to when somebody on a tracker should fix?

We have just gone through a 14-year period where it turned out that trackers were incredibly good value, relative to fixed-rates (or non-tracker variable rates), due in large part to idiosyncratic factors in the Irish mortgage market.

It looks as though that period has now come to an end and I think there is now a window where Irish fixed-rates represent really good value, again largely because of idiosyncratic Irish factors.

Personally, I would jump at some of the longer term fixed-rates on offer today, unless I had a particularly low margin (sub 90bps) tracker with 10 years plus to run.


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## Brendan Burgess

So we went to  2.5% yesterday.

And the ECB said that there would be a further series of interest rate rises. 

So we can assume 3% in February. 

I think it's hard to forecast beyond that.  The ECB seems intent on raising them further but forecasting the economy and interest rates is very difficult. 

Maybe assume 3.5% in April   but plan for 4% from June? 

If interest rates don't rise to that level, or fall again, fine. But make your decision on fixing based on 4%? 

Brendan


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## Protocol

Markets may underestimate how high ECB rates will go
					

The European Central Bank will need big rate hikes at least at its next two meetings and markets may still be underestimating how high interest rates will have to go, Finnish central bank chief Olli Rehn said today.




					www.rte.ie
				




Markets may still be underestimating how high ECB rates have to go - Rehn​


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## Paul F

Protocol said:


> Markets may still be underestimating how high ECB rates have to go - Rehn​


It never Rehn but it pours.



Sorry.


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## PebbleBeach2020

I'd a tracker but I've given it up. The increases again this week with more to come are just too much to bear.


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## Protocol

Based on C. Lagarde's replies at the press conference, I now think 4% is possible by June 2023.


*I have two questions. One on “the significantly higher rates at a steady pace”. Does that mean we are going to see more 50-basis-point hikes in the future? And how many do you envision if you see significantly higher rates?

On QT, quantitative tightening, how do you decide which one do you reinvest and which not? Is there also a metric behind?*

On the first one, I’m glad that you picked up the key messages that are really embedded in this monetary policy statement that I have just read for you. One of the key messages, in addition to the hike that we decided today, is the indication that not only will we raise interest rates further, which is something that we had said before, but we also say that today we judged that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, to ensure a timely return of inflation to our 2% medium-term target. I’m reading straight from the monetary policy statement, first paragraph, because that is the one that that really includes the four key messages that we have. One of them is that we, at this point in time, expect and judge that we will have to raise interest rates significantly. Now, what does that mean? You have to read it together with the steady pace. It is pretty much obvious that, on the basis of the data that we have at the moment, significant rise at a steady pace means that we should expect to raise interest rates at a 50-basis-point pace for a period of time.

The second element that you have in this paragraph is the reference to a steady pace, so it’s significant, and it has to be a steady pace, which means that we have made progress over the course of the last few months, but we have more ground to cover. We have longer to go, and we are in for a long game.




Also, see below:









						ECB will hike interest rates further - De Guindos
					

The European Central Bank will hike interest rates further in the euro zone to combat high inflation, ECB's Vice-President Luis de Guindos said today.




					www.rte.ie


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