Experts predict Euribor rate to peak in fall

Euro banknotes on display at the Bank of Estonia.
Euro banknotes on display at the Bank of Estonia. Source: Siim Lõvi/ERR

Inconsistent expectations about the central bank's monetary policy activities have caused market volatility. The current prognosis is that the Euribor will peak in the fall, followed by a slight decline.

Rasmus Kattai, head of economic policy and forecasting division at the Bank of Estonia (Eesti Pank), said that the money markets anticipate an increase in the Euribor, which will peak likely this fall.

While Estonia is mainly interested in the six-month Euribor, which is used for many people's home loans, future transactions are made at the three-month Euribor, so the forecast has to be based on the difference between the three-month and six-month figures.

"This means that if the three-month Euribor peaks in autumn at 3.6 percent, the one-month Euribor should remain below four percent," Kattai said.

Mihkel Nestor, an expert at SEB Bank, said that the Euribor may also increase above what Eesti Pank has predicted. "Inflation remains a threat to the euro zone economy, and the only way to control it is to increase interest rates. It is difficult for an expert to be smarter than the market, but I would not rule out the potential that the Euribor may exceed Eesti Pank's projection," Nestor told ERR.

Nestor added that, in the longer run, it is conceivable that the European Central Bank may cut its interest rates when inflation gets under control, hence lowering the Euribor.

Swedbank told ERR that they expect the European Central Bank will hike the base rate twice more by 0.25 percentage points and that the Euribor will reflect this. "The current expectation is that the Euribor six-month rate will reach just below four percent and then start falling again," Liis Elmik, senior economist at Swedbank, said.

Interest rates have become more unpredictable

According to Kristo Aab, an economist at LHV, the peak in the Euribor rate projection for autumn indicates that markets are also anticipating at least two interest rate hikes from the central bank in spring-summer, albeit at a slower pace than in the past. "The European Central Bank has made it clear that it is willing to raise interest rates above current levels and keep them there for an extended period of time," he said.

According to Aab, market participants' expectations have shifted frequently in recent months, implying that the prognosis for the interest rate environment has become more uncertain than usual. "Only a few weeks ago, it was expected that the six-month Euribor would peak closer to 4.5 percent," he explained. "However, uncertainty in the American and European banking sectors pushed the predicted interest rate back down."

Currently, the markets are offering values between 3.3 and 3.5 percent for the remainder of the year.

Nestor said that, as a result of Silicon Valley Bank's issues, the market anticipated that central banks would have to stop rising interest rates and instead focus on stabilizing the banking system to prevent worsening.

"Long term, it appears likely that the price of Euribor futures will return to the levels expected by markets prior to the Silicon Valley Bank case."

"European banks are well capitalized and subject to strict central bank supervision, making an occurrence similar to Silicon Valley Bank unlikely," he added.


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Editor: Kristina Kersa

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