Fall in Euribor is unfolding, a trend that began last November. It brings relief to many lenders and investors, even if it isn’t the same for every borrower. The Euribor index, which reflects the average rate at which banks lend to each other, serves as a key reference in evaluating mortgage payments. In Spain, this downward movement is expected to translate into lower costs for borrowers in the coming months, while it also signals shifts in the pricing of deposits for financial institutions. The descent in rates influences the fee banks charge for the money they hold for customers, affecting the Spanish financial sector as a whole. After a long pause, deposit rates have risen less than in previous cycles, even as the European Central Bank’s policy moves push official rates higher in the euro area.
Since the ECB began tightening monetary policy in December 2021, the Bank of Spain reported that the monthly average rate for new term deposits rose 0.06 percentage points to 2.57 percent, up from 2.51 percent the previous November. Over the same period, Euribor on a one-year horizon shifted from -0.502 percent to 4.022 percent, while the eurozone average for new deposits to households rose from 0.23 percent to 3.33 percent. As a result, the overall balance of savings tension eased somewhat, with term deposit shares among households in Spain increasing from 0.04 percent to 1.8 percent, and in the euro area rising from 1.14 percent to 2.28 percent. These movements illustrate how banks balance liquidity against the need to attract and retain deposits across the eurozone.
Looking ahead, central bankers are anticipated to ease the pace of rate hikes. The ECB has not signaled aggressive cuts, yet market expectations for medium-term reductions have grown. The twelve-month Euribor fell to 3.679 percent last month, and analysts anticipate further declines by year-end 2024, with projections around 3.06 percent by Bankinter and 3.25 percent by CaixaBank. This outlook suggests limited room for further increases in deposit interest rates while the pricing of loans may follow a similar path toward stabilization.
liquidity issue
All signs point toward a gradual rebalancing rather than a sudden shift. Bank of Spain estimates indicate that banks transferred about 3.96 percent of the Euribor rise into household term deposits between December 2021 and the same month in 2022. In the first half of the following year, the pace quickened and reached the 2020 liquidity transfer level. By last June, deposits rose by roughly 23.09 percent, yet a substantial portion remains below peak historic levels. This pattern aligns with observed behavior across the euro area during earlier cycles, where liquidity management played a central role in deposit pricing.
In its latest financial stability assessment, the Bank of Spain noted a range of factors influencing rate dynamics, including initial negative Euribor levels, excess system liquidity, and market structure. The central bank also highlighted that changes in financing costs from the Eurosystem in the coming months could sustain some upward pressure on average deposit rates.
Banks are nearing the end of a period of heavy liquidity injections from the ECB during the most challenging times of the pandemic. Those injections boosted bank liquidity but also encouraged higher deposits to preserve funding. Yet the economy remains resilient, with demand for loans easing, which reduces the need to accumulate funds for lending. This dynamic suggests a careful path ahead for banks as they navigate liquidity and funding costs in a cooler credit environment.
more expensive loans
Loan dynamics show that mortgage and consumer borrowing costs are not moving in lockstep with economic activity. In Spain, the average rate on new mortgages increased to 1.38 percent from 1.38 percent in December 2021, then rose to 3.79 percent in November as other credit lines climbed. Across the eurozone, the rise was from 1.31 percent to 4.01 percent for mortgages and from 5.06 percent to 7.85 percent for other family loans. Consequently, the average rate on household borrowing in Spain in November stood at 3.68 percent for mortgages and 7.05 percent for other loans, while eurozone figures were 2.4 percent and 5.45 percent respectively.
The impact on household budgets is evident: monthly interest expenses have expanded, while the growth in interest earned on deposits has lagged. Since December 2021, household interest payments have risen by roughly 1.286 billion euros, with total payments moving from 1.344 million to 2.630 million in the latest November. On the deposit side, only modest gains in interest income have occurred, and the separate impact on current accounts remains limited. The result is a wider margin for financial institutions, though the improvement is not uniform across all sectors. Across the broader banking system, the aggregate margin shows a notable expansion, reflecting a shift in the balance between lending costs and deposit funding.
One structural factor behind these patterns is the composition of household assets. About 87.8 percent of money held in accounts sits in funds and deposits where the average interest rate has barely moved, hovering between 0.02 percent and 0.15 percent since December 2021. Savings in the past cycles tended to be spread across deposits and other accounts, often balancing out sharp rate moves. The current environment still shows a strong tilt toward deposits as a stable funding source, even as term deposit rates rise and banks adjust profitability.