ECB interest rate cuts may lead to further drop in Euribor

The European Central Bank (ECB) lowered one of its key interest rates to 2.75 percent on Thursday, believing that inflation is slowing down as expected. Analysts say the Euribor may also fall further this year in anticipation of more interest rate cuts.
The ECB's Governing Council decided to lower three key interest rates by 25 basis points. The most important of these, the deposit facility rate, was lowered to 2.75 percent.
This is the rate through which the Governing Council steers its monetary policy stance, the ECB noted, adding that its decision to lower this rate was based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.
Financial markets had been anticipating this decision from the central bank, as the six-month Euribor, or Euro Interbank Offered Rate, had already fallen to 2.59 percent.
Redgate Capital partner Valeria Kiisk said that the Euribor may fall even further in anticipation of further interest rate cuts.
"Right now, the expectation is that it could be just under 2 percent by the end of the year," Kiisk said.
"I think the speed at which the next cut happens will depend on the state of the economy because, inevitably, we still have some structural challenges, ranging from demographics to competitiveness," she explained.
The drop in the Euribor, however, means cheaper mortgage payments, as interest rates on many loans in Estonia are tied to the six-month Euribor.
"For example, if we take a property worth €175,000 with a 30-year mortgage of €150,000, the average monthly payment when the Euribor peaked in October 2023 was €880," explained LHV retail banking chief Annika Goroško.
"Now if we take the current Euribor level of 2.59 percent, that monthly mortgage payment has actually already decreased by more than €100," she highlighted.
According to Goroško, the lower Euribor has already increased demand for new loans as well.
Estonian economy to get a boost
As inflation has not yet been fully brought under control, the ECB may reduce interest rates even further, but this will depend on economic developments within the eurozone.
"Price increases in the euro area are gradually decreasing and are expected to reach around 2 percent by mid-year, which is the target the ECB has set," said Bank of Estonia governor Madis Müller.
"It can be expected that the ECB will cut interest rates again in the coming months, but how far exactly and at what pace, and with what measures this can be done, I don't think it's appropriate yet to express a precise opinion on," he added.
According to Müller, interest rate cuts will give the Estonian economy a boost.
"If people's monthly mortgage payments are lower, it means they'll have more money available to spend on other goods and services," he explained. "This supports consumption and retailers. The same applies to businesses, where more money will be available for other activities and investments."
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Editor: Merili Nael, Aili Vahtla