How can the Euribor rate be brought down?

2024-03-08 at 13:24 Timo Löyttyniemi

Investors are waiting and hoping for interest rates to fall in Europe. Underlying these expectations are the decreasing inflation figures that are approaching the regular 2% mark. The latest published consumer inflation rate was 2.6%. This is baffling because the interest rate on mortgages persists at 4 to 5 per cent. Why isn’t this interest rate falling?

Unexpected rise in interest rates in 2022

Overall interest rates have been declining over a period stretching from the 1980s to 2022. This period of almost 40 years was rare. It is rare even if you look far back into the past, centuries or millennia by some estimates.

Although investors had been waiting – and in some cases downright hoping – for a rise in interest rates, it just didn’t happen. Finally, interest rates shot up, but from a completely unexpected direction. Covid-19 and Russia's energy war and other actions triggered an inflation which was inevitably followed by an overall increase in interest rates. All this took place during 2021–2022 when interest levels rose in Europe and the United States.

As a result, the US Federal Reserve raised the bank rate to the current 5.25–5.50%, while the euro area central bank, the ECB, increased its deposit policy rate from a negative figure to the current 4%. This was unavoidable because central banks are tasked to keep inflation under control. In Europe, the Euribor rate follows the central bank policy rates. Euribor exceeded the zero mark in April 2022. Until then, we had been enjoying negative interest rates for a long time.


Everyone is hoping for the interest rates to fall. Many believe that the inflation rate will slow down this year close to the central banks' 2% target. Currently, the interest rate on German government bonds is 2.4%. This level of rates must be understood in relation to the expected downward trend in inflation. However, 12-month Euribor rate is currently 3,7 %.

Interest rate forecasts or wishful thinking are not always on the mark. When institutional investors are asked about interest rate movements, the forecasts almost invariably tend towards the average. More often than not, investors expect interest rates to return to normal levels. Now normality is lower than the current ECB policy rate and Euribor rates. The ECB controls interest rates, and the Euribor rate follows the policy rates very closely indeed. Therefore, the key to lower Euribor rates is a cut in the ECB's policy rates.

Explanation for Euribor

Home loans are typically tied to short-term Euribor rates in countries like Finland and Sweden. However, the Euribor rate has not decreased at the same pace as inflation, with the result that mortgage borrowers are now paying 4–5% in interests. Euribor is one yardstick for interbank financing. Yet only a small portion of interbank funding is financed by the Euribor market or by central bank funding as most of it is financed by customer deposits in the banks. Why is the mortgage rate tied to Euribor instead of the customer deposit rate? There may be a number of reasons for this. One explanation is the cost of marginal additional funding for banks.

In conclusion

Investors' belief in lower interest rates is solid, based on hopes and confidence in easing inflationary pressures. In the best-case scenario, the interest rates that jumped to unacceptably high levels for two years will return to normalcy this year. In normal circumstances inflation will slow down to 2% and the interest rate on government bonds will remain slightly higher than that, while the short-term rate will fall lower. Such conditions would facilitate a wide range of activities without encouraging excessive risk-taking. If interest rates were to remain at the current level and inflation were to continue to slow down, it would wreak a lot of havoc. In particular, problems in the real estate sector would persist and be aggravated. This would be extremely detrimental to economic growth.

Central banks play a crucial role in the development of the real estate market. There are a number of indications suggesting that the 12-month Euribor mortgage rate will come down this year. While forecasts are sometimes off the mark, one can share this wish. This forecast will come true when the European Central Bank cuts its policy rates, something that investors do not expect to happen until this summer. After that, however, borrowers will still have to wait several months for the mortgage rate to fall, depending on their individual interest rate period if the mortgage rate is variable and tied to short-term rates. As the mortgage rate drives the real estate market, it is a major factor in determining the business cycle.

Writer is VER's CEO Timo Löyttyniemi.

TLö blogi 2020


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