Europeans worried about interest rates

Property developers are already readjusting their housing plans for December and all of 2023 considering that interest rates will continue to rise and will end up affecting mainly current mortgages, but also potential mortgagors, who, faced with the uncertainty of the coming months, will prefer not to become homeowners and to park their purchase projects via bank financing. 

Everything is uncertain at the moment. Here in Europe, analysts are preparing their year-end forecasts under a series of scenarios, basically two: 1) that the current macroeconomic situation with the current shock in the energy market and the invasion of Ukraine will remain ceteris paribus, but for long months, at least until the end of 2023; or, 2) that the scenario worsens and lasts beyond 2023. 

The only feasible scenario, for the time being, is that in order to contain inflation, which continues to escalate and continues unabated in most European economies and in the United States and other neighbouring countries, governments will continue to use monetary policy through their respective Central Banks and interest rates will soar until inflation is reduced to single digits. 

A strategy that is difficult to successfully crystallise given the persistent disruptions in supply chains that are dragging on not only from the pandemic, but also from the US-China trade war; and from the multiple sanctions imposed by the US and its allies on Russia for the invasion.

There are many concrete but also abstract factors that are influencing market behaviour and this is negatively impacting the secondary and tertiary sectors. These shortages and the expectation that everything will get worse have caused a vicious circle between the two sectors and the consumer is paying for it ergo his pocket and his income.

With the interest rates, their immediate future glimpses into the willingness of the respective Central Banks to continue along the same route, to what level will they cap it?

After several years of a lax monetary policy of low interest rates, even zero in European countries, and even negative, restrictive monetary policy has been revived... as in the old days, we would say it is the same old bitter recipe, the magnesia of orthodoxy.

Since 15 June, the Federal Reserve has moved its interest rates by 0.75 points, between 1.5 and 1.75%, and has adjusted them by a further 0.75 points and everything points to raising them again on Wednesday 21 September by a further 0.75 points to bring its rates to between 3 and 3.25%.

The Swiss central bank has also moved its rates from -0.75 to 0.25%, the first time it has raised them for 15 years, and it will not be satisfied with this move either. 

The Bank of England broke its sluggishness and increased its rate to 1.25% and has continued to do so consecutively until it reached 1.75% and is not prepared to stop.

At the same time, the European Central Bank (ECB) came out of its comfort zone by adjusting its rates: it did so for the first time on 21 July last and arrives in September with rates at 1.25% for main refinancing operations, 1.50% for the marginal lending facility and 0.75% for deposits.

Farewell to the long years of lax monetary policy to boost the economic recovery hit by the subprime crisis; this oxygen balloon through low rates - in many cases at zero levels and in others in negative territory - allowed the purchasing power of companies, individuals and families to have a little breathing space in financing.

This cycle is over: paying in easy monthly instalments will once again become a nightmare because the ECB has decided to break with 11 years of not raising rates.

For Europeans, especially Spaniards, who are used to owning their own homes and taking out long-term mortgages, this turnaround is terrible news. There is a lot of unease because the banks are also very clear and a mortgagor can easily lose his home because interest rates make his life impossible and his salary cannot withstand the coming spiral.