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

The European Central Bank (ECB) could increase interest rates above 3.5 per cent, and keep them there for the rest of the year to fight inflation, Central Bank of Ireland governor Gabriel Makhlouf has said.

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Mr Makhlouf also dismissed suggestions the ECB will start cutting rates later this year as inflation declines. “I think that really is going too far,” he said. “We’ll reach a point where we’re going to then plateau.

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How big a differential between the Euro and US interest rates is sustainable before there's a capital flow out of the Eurozone?

Two members of the group that sets interest rates at the ECB warned on Friday the bank must keep fighting to slow price growth, with one warning it will be next year before any rate cut is possible.

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Ms Schnabel’s comments helped push bets on the financial markets that the ECB may now cap its deposit rate at 3.75 per cent. That implies its main interest rate used for mortgages would peak at 4.25 per cent, up from 4 per cent previously.

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Separately, Francois Villeroy de Galhou, another member of the governing council, said interest levels would likely reach their peak, or “terminal rate” by September at the latest. Importantly, Mr Villeroy de Galhou, who is also governor of the French central bank, effectively ruled out the prospect of a rate cut before 2024 at the earliest.

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Paywalled article but I found the following snippet interesting:

The ECB forecasts inflation across the euro zone will dip to 6.3 per cent this year, to 3.4 per cent in 2024 and down to 2.3 per cent in 2025.

However, there is a growing body of economists who think we might get stuck somewhere along that path. The logic here is that price growth has passed from commodities such as oil and gas into services such as rented accommodation, childcare and insurance, which translate more readily into wage demands, reverberating back into higher prices.

The high priest of this analysis is Egyptian-American economist Mohamed El-Erian. He believes inflation, even with the impact of higher interest rates, might stall at around the 4 per cent range. “Increasing wage pressure” is driving this change, he said in a recent article.

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The European Central Bank (ECB) deposit rate is now at 2.5 per cent – and up to recently the expectation had been that it would top out around 3 per cent, or slightly higher. Now, financial markets expect that this rate could rise to 3.75 per cent.

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This would mean that the other key ECB rate – the refinancing rate – off which tracker mortgages are priced could reach 4.25 per cent, pushing the average tracker rate to not far off 5.5 per cent.

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Due to huge amount of reserves held by comm banks on deposit at the ECB, it is the deposit rate that has become the main policy rate.

I am also worried that high inflation has become "embedded".

I don't see grocery price inflation slowing down.

It is a long way down from 8% inflation to 2% inflation.

If inflation falls from 8/10% to 4%, but not any lower, how will the ECB react?

The ECB has raised rates by 3 percentage points since last summer. Financial markets are pricing in a jump in the bank’s deposit rate to 4 per cent later this year, up from 2.5 per cent. That would overtake the 2001 peak of 3.75 per cent.

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If that happened it would probably mean that the main ECB lending rate – the refinancing rate – would increase to 4.5%.

Tracker mortgage interest rates equal the ECB refinancing rate plus your tracker "margin" – often stated in your tracker mortgage contract as, e.g., "ECB + 1.25%". So an ECB refinancing rate of 4.5% and a tracker with a margin of 1.25% would mean a tracker mortgage rate of 5.75%.

I have to be careful reading articles these days, as years ago the ECB re-fi rate was the "main" policy rate.

Now it seems the deposit rate is the main policy rate.

I wonder are all the journalists aware of this?

ECB refinancing rate today = 3% since 8-Feb 2023

Due to increase in March, as stated by ECB in 2-Feb meeting.


Next meeting due 16-March 2023.

The re-financing rate will be increased to 3.5% then.


Today, we hear from Philip Lane:

https://www.independent.ie/business...ate-hikes-will-not-end-in-march-42371439.html


"European Central Bank chief economist Philip Lane has indicated for the first time that interest rates will rise again in May, in addition to a hike widely expected to happen next week.

It means the ECB interest rate now looks set to be at least 3.25pc by May, the next scheduled meeting of policy makers after March 16th.

He made the speech during a speech to students and staff at Trinity College Dublin on the theme of assessing underlying inflation in the euro area, a measure that strips out volatile elements of inflation to determine the essential economic effect.

“The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting, while the exact calibration beyond March should reflect the information contained in the upcoming macroeconomic projections, together with the incoming data on inflation and the operation of the monetary transmission mechanism,” he said."


Be careful here - the 3.25% mentioned looks like the deposit rate, not the re-financing rate.

I'd be on the fence and weighing on the side of keeping the tracker.

UK is forecasting dramatic drop off in inflation next year and negative rate in 2025.

As the current inflation issue is very much an international problem, you could see eu rates follow the UK trend and drop faster than even current optimistic forecasts are suggesting.

Almost all the inflation driving commodities have fallen back hugely in the last 2-3 months and they will feed into the market over the coming months (some can take a year) which will drag inflation back and a corresponding drop in ECB rates back under 2%.

Tomorrow's rate decision and comment will be interesting. Some are saying it will be 0.25% rather than 0.5% and may signal it topping out at that.

Where are the future rates actually headed , people are rushing to fix but are they being hasty ???
If your on a Variable Rate and can afford to wait the current rises out are you better off ???
See the IMF forecast here .

https://www.imf.org/en/Blogs/Articl...s-pre-pandemic-levels-when-inflation-is-tamed

To paraphrase, economists have predicted nine of the last five decreases in interest rates.

CorkHome2022 said:

Where are the future rates actually headed , people are rushing to fix but are they being hasty ???

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Swap rates and yield curves would say rates were/are going up and are going to stay high for a while.

As for those rushing into fixing, most of those on non-tracker rates faced little or no trade off. Fixed rates were lower than variable rates.

CorkHome2022 said:

If your on a Variable Rate and can afford to wait the current rises out are you better off ???
See the IMF forecast here .

https://www.imf.org/en/Blogs/Articl...s-pre-pandemic-levels-when-inflation-is-tamed

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While markets have been known to be wrong - just look at how expectations surrounding central bank rates have jumped in the last year - the above analysis is a step removed from the mortgage rates on offer to you and I.

The question is not how will real policy rates move but how will Irish lenders adjust their nominal lending rates in response to lower policy rates. Look back at the last time the ECB lowered it's policy rate and the time it took Irish lenders to do the same.

I would imagine there is a very good chance that someone who locked in a rate last year will enjoy the security of a fixed rate for a couple of years and will still face higher rates when their fix expires.

For those getting a mortgage soon, surely variable is a better option as 1. can overpay 2. rates are generally lower 3. rates are likely to peak this year and then decrease? Thoughts?

settlement said:

For those getting a mortgage soon, surely variable is a better option as 1. can overpay 2. rates are generally lower 3. rates are likely to peak this year and then decrease? Thoughts?

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On point 1. You can overpay any mortgage type.

On point 2. Is there a good reason to assume this will continue to be the case? It might hold it might not. Personally I think it's more likely banks are taking a softly softly approach to increasing variable mortgage rates because (i) they can (thanks to cheap deposit funding) and (ii) this way there should be less negative publicity (they can claim they've left it much later than other banks in Europe). Bank investors want a return on their cash and raising variable rates is an easy to make that money or put another way, every month they don't put up variable rates they're leaving money on the table.

On point 3: The way the ECB are putting up rates and the number of months left in the year, it seems a reasonable statement. On how long they will stay there, Philip lane (ECB chief economist no less) would seem to argue you'll be waiting a while for a decrease.

On the article you'd have to wonder how long the ECB thinks we can go with (core) inflation ticking along at many multiples of the ECB target before inflation expectations becomes "embedded"? In terms of this thread it's also interesting to see the article state: "the peak in rates is seem [to be] just below 4%"

To go back to point 3 I'd also reiterate a point from a previous post: Policy rates don't equal mortgage rates in either level or pace of change.

So would one be better with a longer fixed rate in the current climate?

Pinoy adventure said:

So would one be better with a longer fixed rate in the current climate?

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I think the question of variable Vs fixed is much clearer than short fix Vs longer fix.

A quick look at bonkers and the cheapest variable rate is 2.95% (Haven). The cheapest fixed rate would be a 3 year fixed at 3.3% (Avant). That's only a 0.35% margin to lock in for 3 years. In a rising interest rate environment that would seem like a low premium to pay for 3 years of certainty.

Avant also offer the best 7 year rate (4%). Should I fix for 3 or 7? The unknown here is the what the rates on offer will be in 3 years time. Obviously no one knows but you can work out the breakeven rate and ponder that. 4.59% is the break even rate I.e., the rate where the interest cost on 3+4 year fixed mortgages equal the interest cost on a 7 year fixed.

If the 4 year fixed rate (in three years) is above 4.59% I would have been better off on the original 7 year fixed. Below and the current 3 year was the better option with hindsight.

The current best 4 year rate (also Avant) is 3.45%. So in this example it comes down to whether of not you think the 4 fixed rate will increase by 1.14% over the next three years.

skrooge said:

I think the question of variable Vs fixed is much clearer than short fix Vs longer fix.

A quick look at bonkers and the cheapest variable rate is 2.95% (Haven). The cheapest fixed rate would be a 3 year fixed at 3.3% (Avant). That's only a 0.35% margin to lock in for 3 years. In a rising interest rate environment that would seem like a low premium to pay for 3 years of certainty.

Avant also offer the best 7 year rate (4%). Should I fix for 3 or 7? The unknown here is the what the rates on offer will be in 3 years time. Obviously no one knows but you can work out the breakeven rate and ponder that. 4.59% is the break even rate I.e., the rate where the interest cost on 3+4 year fixed mortgages equal the interest cost on a 7 year fixed.

If the 4 year fixed rate (in three years) is above 4.59% I would have been better off on the original 7 year fixed. Below and the current 3 year was the better option with hindsight.

The current best 4 year rate (also Avant) is 3.45%. So in this example it comes down to whether of not you think the 4 fixed rate will increase by 1.14% over the next three years.

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Any input on the 3year fixed vrs the 5 year fixed with AIB in the current environment ??

It's not always the case that banks will track the direction of the ECB rates. Circa 2013 ECB rates have been static for quite a while but AIB were still increasing there's.

Pinoy adventure said:

Any input on the 3year fixed vrs the 5 year fixed with AIB in the current environment ??

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This is veering off topic when it comes to this thread but there is only a 0.1% difference between those rates. So going with a five year rate you'd be betting on the 2 year fixed rate (available in 3 years time) being above 4.36%. that's more or less the rate on offer right now.

One approach would be to look at what the current term structure of interest rates would imply for expectations for a 2 year swap rate (in 3 years) and compare that to the current 2 year swap rate. It would be as good a guess as any to what the market thinks it would cost to offer a 2 year fixed by then.

While swap rates are a factor in bank pricing I think competition (or lack of it) also needs to be considered. Lenders will be happy to pass on higher costs as rates rise they may be slower to move when costs go in the other direction.