The cost of money in Europe is rising, pushing banks to tighten lending to customers. As a result, loans and variable-rate mortgages are becoming more expensive. Europe’s central banking authority, the European Central Bank, decided to raise its main rate by 0.5 percentage points, taking it to 3.5 percent. This marks the highest level since November 2008 and follows an increase announced six weeks earlier. Investors remain wary after recent bank troubles, including Silicon Valley Bank and Credit Suisse. The situation eased temporarily when the Swiss bank received support, easing pressure on the ECB.
The primary outcome of the rate increase is higher borrowing costs for consumers, especially for loans tied to variable rates. Analysts note that rumors about a smaller-than-expected rate move earlier in the week affected Euribor, the benchmark used to price most mortgages. Euribor represents the average rate at which banks lend to one another. The daily Euribor figures showed declines on several days, reflecting ongoing market sensitivity. One analyst, Miquel Riera, explains how these movements influence mortgage costs for households.
ECB policy remains the focal point as the rate path continues. The current levels imply higher payments for those with mortgages, and rate futures suggest further movements. An analyst from XTB notes that households could face around an additional 300 euros per month on a typical 25-year loan if rates stay near 3.8 percent, with a possibility of reaching the 4 percent area soon. Riera emphasizes the importance of watching upcoming forecasts from major institutions for the May and June policy meetings.
On another front, pressure on banks is increasing. Some Spanish institutions have expressed resistance to the six rate hikes already delivered by the ECB. The latest rise in the price of money could prompt banks to reassess their strategies for attracting and retaining customer deposits. An analyst from XTB comments that banks currently hold ample liquidity and do not feel compelled to raise deposit rates immediately, as customers do not push for higher yields at the moment.
Fixed income in the spotlight
Related developments show growing appeal for fixed income products. Despite potential recession risks in the euro area, the push for higher interest rates is expected to persist in the coming months. Market participants anticipate a peak in rates during the first half of the year, with fixed income investors seeing opportunities to strengthen portfolios. A fixed income specialist from Tressis notes that debt markets have performed particularly well at the start of this year, offering a window for strategic allocations.
Government bonds have gained prominence as a result of higher money prices. These securities now offer yields in the lower to mid single digits for 12-month horizons, positioning them as credible alternatives to traditional bank deposits. A portfolio manager at Norbolsa explains that corporate loans and bonds with three to five-year maturities present attractive options, while still incorporating a cautious stance toward shorter Treasury securities. The evolving landscape suggests a balanced approach to risk and return as markets adjust to the new rate environment.