2023-11-02 18:55:00
Borrowing money has never been so expensive in a long time. According to a statement from the Central Bank of Luxembourg published in the middle of October, the variable interest rate for household mortgage loans, for example, increased again to 4.67% in August. The fixed rate was 3.80% in August. The interest rate for consumer loans with a term of between one and five years even increased by 28 basis points in one month and stood at 5.33% in August.
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Fixed or variable, interest rates continued to rise this summer
Consumers are not the only ones to suffer the consequences: banks and the construction sector are also paying the price. The volume of loans decreased significantly in all categories compared to previous years. Many are therefore nervously looking towards Frankfurt. After ten consecutive interest rate hikes, the European Central Bank (ECB) took a break for the first time last week and kept its key rate at 4.5 percent.
Inflation falls sharply
Given the fall in the inflation rate, which has fallen on average by more than half compared to its peak last year in Eurozone countries, the question arises whether a “turnaround in rates downward interest” is imminent.
“We indeed believe that interest rates will no longer increase significantly in the coming months. In the current geopolitical context and also taking into account the still very high inflation, we do not expect an immediate reversal of the trend,” says Laurent Derkum of Raiffeisen bank, when asked about this.
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For Claude Hirtzig of Spuerkeess also, “it is still too early to talk about the start of a turnaround in interest rates. We can say that current inflation is falling at the rate expected and desired by central banks,” he says. “If this situation continues, central banks will not change their interest rates and will expect inflation to continue to fall. But if central banks see that inflation is not falling fast enough, they could raise interest rates again.
A shift
In any case, changes in the key rate are only reflected in banks’ rate policy with a certain delay. “Even though no interest rate hikes are expected in the near term from central banks, local banks may not yet fully reflect monetary policy changes and recent interest rate increases on interbank markets in their interest rates. Further increases in loan interest rates are therefore possible,” explains Claude Hirtzig.
There is no direct correlation between mortgage interest rates and the evolution of the key rate on the part of the ECB, explains Laurent Derkum. “Thus, the Raiffeisen bank has deliberately refrained from passing on to our clients all the increases in ECB interest rates that have occurred so far, in particular the latest adaptation,” explains the professional. Currently, no further rate changes are planned by the bank.
As commercial banks have not yet fully factored in rate hikes, there could once again be a delay in rate cuts.
As things stand, he believes the likelihood of a rate cut is low. “In the current environment, we do not expect any changes in the short term and assume that interest rates will remain at their current level in the coming quarters,” explains Laurent Derkum.
Wait until the second quarter of 2024
Claude Hirtzig refers to market forecasts which indicate “that the European Central Bank will probably carry out a first rate cut in the second quarter of 2024”, he says. “As commercial banks have not yet fully factored in rate hikes, there could once again be a delay in rate cuts.”
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The real estate market is also slowing down in Luxembourg’s neighboring countries
ECB President Christine Lagarde stressed last week that currency guardians “must be constant” and added: “A discussion on rate cuts is totally premature.” The fact that the central bank has taken a pause does not mean “we will never raise rates again.”
This article was originally published on the website of Luxembourg word.
Adaptation: Laura Bannier
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