Following an inflation rate in the Eurozone that reached 3.2% in May, the European Central Bank (ECB) raised its main refinancing rate by 25 basis points to 2.25% in mid-June. This measure was a response to the inflationary surge, which was significantly influenced by the consequences of the Iran conflict. In June, inflation in the Eurozone provisionally softened to 2.8%, with Germany recording a rate of 2.3%.
Economists point out that the German fuel discount, which was limited until the beginning of July, had dampened national inflation and its expiry in July is expected to lead to a renewed increase. Currently, the escalation of the conflict surrounding the Strait of Hormuz is causing further uncertainty in the bond markets, which is manifesting in rising yields for German government bonds.
ECB Course and the Role of Core Inflation
Marco Schöfl, Director Sales at Qualitypool GmbH, commented on the ECB's first interest rate hike in three years as a clear step. He sees two main reasons for this: On the one hand, the central bank might feel that it acted too hesitantly during the recent inflation crisis and is now aiming for a more proactive approach. On the other hand, the oil price shock is hitting Europe harder than the USA, also with regard to potential supply chain risks. ECB President Christine Lagarde justified the decision with an increase in core inflation from 2.2% to 2.5% as well as stronger-than-expected service prices. The ECB adjusted its growth forecast for the Eurozone for 2026 only slightly, from 0.9% to 0.8%.
The next meeting of the European Central Bank is scheduled for 23 and 24 July. Market observers expect at least one further interest rate step of 25 basis points by the end of the year, although this is likely to occur only after the summer break. Schöfl emphasises that the extent of second-round effects from the energy price shock in the coming months will be crucial for a further interest rate step. The recently fallen inflation rates in the Eurozone and in Germany had temporarily reduced the pressure on the central bank. Now, developments in the conflict will significantly influence interest rate policy.
US Monetary Policy and Mortgage Interest Rates
In the United States, the Federal Reserve (Fed) remains in a wait-and-see position regarding its monetary policy. In June, the Fed left the key interest rate unchanged for the fourth consecutive time at 3.50% to 3.75%. The new Fed Chairman, Kevin Warsh, has so far refrained from providing a specific interest rate forecast and maintains a more reserved communication style. The unexpectedly weaker June labour market report, with only 57,000 new jobs created, dampened expectations for an interest rate hike. Marco Schöfl notes that there is no uniform course discernible within the Fed: one part of the committee still considers inflation to be too high, while another refers to the cooling labour market, which leaves US monetary policy in limbo for the time being.
The best rates for 10-year mortgage financing are currently in a range of 3.4% to 3.6%, while 15-year fixed rates are quoted at approximately 3.6% to 3.8%. Schöfl describes mortgage rates as having been in a narrow corridor for months. The fall in oil prices and subsiding inflation recently had a calming effect on capital markets. This situation allowed for comparatively good planning for financing customers. Should the conflict between the USA and Iran continue longer than expected, this could lead to more significant movements in both bond markets and the interest rate market.
- —A sideways trend is expected in the short term.
- —In the long term, a further ECB interest rate step by the end of the year is likely, but its implementation will largely depend on the development of energy prices and possible second-round effects.
- —In the USA, the monetary policy course remains open and wait-and-see for the time being.
