The ECB is opening the door for further declines, but the decline already has an expiration date.

The fallout from the ECB’s new rate cuts results in a fifth consecutive daily drop in the Euribor rate, which stands at more than 2.7%, very close to the year’s low. The President tried not to give any hints about future changes, but the market, experts and Euribor itself are convinced that the rate cuts will not stop in the coming months. At least until the summer it is clear to them that the ECB will cut rates at every meeting. Good news for mortgages. But it is also true that they can already see the end of the waterfall.

The big question about Euribor is very clear. Where and when will its fall stop? And the situation begins to clear up. The mortgage index is handcuffed to the ECB’s official rates. Currently, the difference between Euribor and the deposit rate is about 50 basis points, which fell to 3.25% yesterday.. The Mortgage Lending Index functions as a leading indicator of the ECB’s actions, but its fate will ultimately be decided at the end of the tapering cycle.

The lower limit of rate cuts and, as a result, the Euribor rate already have a set date.even the levels they can land on. Many Euribor and futures market analysts currently see the end of the cycle at the end of 2025 with a high degree of overlap. Something that hasn’t happened over the past year.

Since late 2023, the market has priced in brutal rate cuts from central banks. Nobody saw them. Neither the central banks themselves nor the experts are in favor of excellent economic health. But the economy is starting to falter. More precisely, employment. And now central banks, and especially the ECB, are preparing for significant interest rate cuts.

Lagarde again seemed enigmatic, but there were a few details that could dampen expectations of a rate cut below 2%. Yesterday’s cut had been discussed for weeks, but the ECB announced a pause in September, so events forced the institution to change pace. Secondly, it is difficult for the ECB to change rates without forecasts for growth and inflation.. Yesterday there was no deadline, the forecast will not be published until the end of September.

Experts and operators review the OIS model swaps financial statements that reflect investors’ hedged positions in the face of interest rate fluctuations. This is a very good indicator, since about billions of dollars move depending on the movements of the ECB, and this is closely monitored by analysts and the central banks themselves. The system expects rate cuts on a per-meeting basis through the summer, which should bring rates to 2%, and adds that there will be additional cuts at the end of 2025 to keep them above 1.75%.

Wall Street Expects Sharp Decline in 2025

The funny thing is that now it is the analysts who see rates still at a lower level than the market. For several months the opposite was true. “Yesterday’s ECB meeting marked the beginning of an era of progressive policy easing, although Lagarde continued to describe the process as dependent on data and meeting after meeting. Now a cycle of rapid cuts is the consensus,” comments Bank of America, one of the largest investment banks on Wall Street. The firm expects the minimum rate to be 1.5% by the end of the year.

They are not the only ones. Other banks such as Citi or ABN Amro are also seeing rates at this level. However, according to a consensus compiled by Bloomberg, rates at the end of 2025 will exceed 2%. The most aggressive analyst firms are those that see the European economy as stuck and in trouble.

For Euribor, this means a significant margin of additional decline next year. Index futures, another way for investors to hedge their positions, are also pointing to below 2%.. Specifically, three-month contracts expiring in December 2025 are valued at 1.855%.

Seventh month of autumn

Euribor will close in October above 2.75%. Mortgage loan surveys are conducted using average monthly amounts. This will be the seventh straight month of decline. And it will lead to the biggest decline in mortgage repayments since Euribor began falling last year.

To see this with an example, for a mortgage of €140,000 for a term of 30 years (360 months) with a difference of 1% and taking October 2023 as a reference (as most mortgages are reviewed after 12 months), when Euribor closed at 4.16%, monthly payment was 765.30 euros.

Now that the preliminary average for October 2024 is 2.759%, the mortgage payments of homeowners who have a review in September will fall to 617.62 euroswhich means they will pay 147.68 euros less than a year ago and the first drops in monthly mortgage payments will begin to be noticed.