ECB interest rates – a finish line with no line

SEB Bank’s Financial Market Department’s manager Andris Lāriņš comments on the European Central Bank’s recent decision and provides his conclusions and outlooks. He adds that Latvian residents’ purchasing power continues going down.
The period of record high and record fast growth of interest rates is not over. On Wednesday, the 26th of July, the US Federal Reserve System went back to interest rate growth path. The US Federal Reserve decided to increase the US dollar’s base interest rate for the eleventh time since the start of 2022, this time by 25 base points. The last time the US dollar’s base interest rate was so high (corridor of 5.25%-5.20%) was in March 2001.
A day later, on the 27th of July, the European Central bank joined the Americans on the path of increase of interest rates. From the 2nd of August this year, the interest rate on the main refinancing operations has been increased by 25 basis points (4.25%), as well as the interest rate on the marginal lending facility (4.50%) and the interest rate on the deposit facility (3.75%). The last time such a high rate on the main refinancing operations was observed for the euro was in October 2008.

Is this the final increase of euro interests rates?

By the time of the September meeting of the European Central Bank, there will be a couple of fresher inflation data publications (for July and August), so at the moment central bank management is not ruling out either another interest rate hike or a possible pause. The ECB is belligerent about tilting inflation to its medium-term objective of 2%, up from 5.5% in June.

Lenders still cannot afford to exhale.

Although the risk of growth is down for all interest rate schedules, central bank’s still cannot afford to exhale freely. Trends on the interest rate market remain unchanged, the expected interest rate hikes by central banks are usually included in Euribor interest rates in advance.
On the 27th of July the 12-month Euribor rate was 4.14%, the six-month rate was 3.972%, and the three-month rate was 3.714%. On the days following ECB’s decision it is likely there will be a slight short-term hike of interest rates. The longer-term interest rates will be likely changed in response to the newest inflation data (Eurozone’s provisional inflation data for July is planned to be published on the 31st of July).
ECB’s outlook remains unfavourable for lending. This is because inflation has been high for too long. This is why what was said in July should be repeated – a small margin for a potential future rate hike should be kept, but not too much.
As a result of ECB’s actions there is now a significant hike for loan costs. The consequence of this is reduced demand for new loans. ECB comments: “Tighter financing conditions also make housing less accessible and attractive as investments, and demand for mortgage loans is down for the fifth consecutive quarter.”

Purchasing power of Latvian residents continues going down

The deposit trend of households in Latvian banks remains unchanged. In June 2023 households’ deposit volume increased by only 1.8% when compared with June 2022, which is the lowest index observed in recent years. Inflation remains high, and residents’ purchasing power continues going down. Corporate deposits increased by +11.7% over the course of the year. But the rate here has been going down in recent months.
The next meeting of the US Federal Reserve System is scheduled for the 19th and 20th of September. ECB will meet again on the 14th of September.
Also read: Rimi claims food product price differences in Baltic States are insignificant