The European Central Bank (ECB) kept its main refinancing rate unchanged at 2.4% at the end of July, thus implementing a temporary pause after the previous hike in June. This decision was presented by ECB President Christine Lagarde as unanimous, although some Council members had already discussed the necessity of a further rate step in July. The consumer prices in the Eurozone, published shortly thereafter, are likely to intensify this discussion.
Inflation in the Eurozone provisionally rose to 2.9% in July, up from 2.8% in June. Core inflation also saw an increase from 2.4% to 2.5%. A key factor for this development was again the energy component, due to a renewed escalation of the conflict in the Middle East during the month. According to experts, the current inflation figures significantly limit the scope for the ECB to continue its interest rate pause.
Marco Schöfl, Director Sales at Qualitypool GmbH, notes that both headline and core inflation are once again above June's figures. The futures markets anticipate a 25 basis point rate hike as probable for the ECB meeting after the summer break on 10 September, with the possibility of further steps until the end of the year. Robust Q2 GDP figures – the Eurozone grew by 1.0% compared to an expected 0.5% – reduce the ECB's concern that a rate hike might impair economic growth.
Developments in the USA and their Impact
The Federal Reserve (Fed) in the USA, under Chairman Kevin Warsh, left its key interest rate corridor unchanged for the second consecutive time at 3.50 to 3.75%. However, this was accompanied by significant dissent within the Federal Open Market Committee: three of the twelve voting members voted for an immediate 25 basis point increase. This represented the strongest contradiction within the body in a decade. The futures markets now see a higher probability of a rate hike for the Fed's next meeting on 16 September.
The market reaction to the Fed meeting was remarkable: the yield on 30-year US government bonds reached its highest level since 2007, the US dollar lost value, and equity markets experienced noticeable declines. Schöfl interprets this as a clear signal that the markets are not readily following Warsh's restrained communication strategy. He points out that a central bank wishing to leave the assessment of future interest rate developments more to market participants, as formulated by Warsh, simultaneously increases uncertainty about the actual monetary policy course. This implies increased volatility for the bond and interest rate markets in the USA and potentially also for Europe.
Impact on Mortgage Interest Rates
After a noticeable change in July, where the best interest rates for 10-year fixed-rate mortgages rose from around 3.4% to approximately 3.7%, a sideways movement at a slightly higher level is emerging for August. Currently, the best rates for 10-year fixed-rate mortgages are in the range of about 3.6% to 3.8%, and for 15-year fixed-rate mortgages at around 3.8% to 4.0%.
Schöfl comments that mortgage interest rates experienced a slight increase in July and are temporarily moving at a somewhat higher level than in the first half of the year. Should the ECB take further rate steps in September and the Fed also tighten the reins, further upward pressure is to be expected. Mortgage customers are advised to secure currently available conditions promptly, for example via a forward mortgage, if refinancing is only required in a few months.
- —Short-term trend: Slightly upward, with increased volatility.
- —Long-term trend: Constant to slightly higher, influenced by geopolitical developments such as the Iran conflict.
