At its latest meeting, the European Central Bank (ECB) raised the main refinancing rate by 25 basis points to 2.65%, and the deposit facility rate to 2.50% accordingly. This marks the ECB's second interest rate hike this year, following a pause in July. The decision was anticipated; the protocols from the July meeting had already indicated that a further increase would be necessary unless the inflation outlook significantly improved. Inflation in the Eurozone rose by an estimated 3.3% year-on-year in August, while in Germany the inflation rate was 2.9%.
Energy prices continue to be a primary driver of inflation. The conflict in Iran, or around the Strait of Hormuz, which has been ongoing since late February, has intensified again after a brief period of easing in the summer, keeping oil prices at a high level. In Germany, record low water levels on the Rhine exacerbated the situation, making transport more expensive and thus further driving up prices for fuels and heating oil. Marco Schöfl, Sales Director at Qualitypool GmbH, deemed the ECB's actions necessary, as Eurozone inflation continued to significantly exceed the target value and price pressure from energy was increasingly passing on to other goods and services.
At the same time, Schöfl pointed out reasons for another interest rate pause: core inflation had stabilised for now, second-round effects on wages failed to materialise, and growth in the first half of the year was primarily driven by exports, while investment and consumption remained weak. He emphasised that further interest rate steps would largely depend on the development of energy prices in the coming weeks. Sentiment in the European economy shows a slight improvement; the EU Commission's Economic Sentiment Indicator reached 98.4 points in the Eurozone in August, exceeding the lows of April, although it remains below the long-term average of 100. Leading German economic institutes have also noticeably raised their economic forecasts recently.
In the United States, the Federal Reserve's (Fed) next interest rate decision is due on 15 and 16 September. Fed Chairman Kevin Warsh gave no concrete indications about the upcoming decision at the central bankers' meeting in Jackson Hole at the end of August. He stated that the Fed would be less committed to a specific course in the future and would instead decide more on a meeting-by-meeting basis. Nevertheless, he made it clear that the 2% inflation target was unshakeable. Given a current rate of 3.7% compared to the same period last year, the Fed still saw “work to do”. Markets interpreted his appearance as “hawkish”, which led to a renewed slump in bond markets in the USA, Europe, and Japan, and a further increase in yields on long-dated bonds.
Political headwinds are also emerging, as US President Trump for the first time explicitly demanded interest rate cuts from Warsh and otherwise threatened a trade embargo against countries with trade deficits. Schöfl commented that the new Fed Chairman was in a difficult position, as three of his colleagues on the Open Market Committee had already voted for a hike in July, inflation was persistent, and the labour market remained robust. This was contrasted by political pressure from the White House, although a trade embargo would likely drive prices higher rather than lower. The outcome of the September meeting remained open, meaning that volatility would persist for interest rate markets on both sides of the Atlantic.
The best rates for mortgage financing have held their level amidst the recent rise in bond market yields. In recent weeks, the best rates for 10-year fixed-rate mortgages ranged from approximately 3.5% to 3.7%, while for 15-year fixed-rate mortgages, rates were around 3.9% to 4.0%. Schöfl stated that the phase of falling interest rates was over for now and the trend had recently been more upwards than downwards. For financing customers, this meant not speculating on the ideal timing but rather securing their financing against multiple scenarios. Those currently planning follow-on financing could secure conditions promptly, for example, via a forward loan. Longer fixed-rate periods would offer additional planning security in this environment.
A possible easing of the situation in the Gulf and a decline in energy prices could allow the ECB a longer pause after this step. Some market observers expect that yields on German federal bonds could return towards 3% by the end of the year, which would also provide some relief for mortgage rates.
- —Short-term trend: Upward to sideways, continued elevated volatility.
- —Long-term trend: Constant to slightly higher; significantly influenced by the development of the Iran conflict and energy prices.
