- On 1 February the Federal Reserve raised rates by just a quarter point; the next day the ECB raised them by half a point.
- The ECB announced another equal rise for March while the Fed eased its pace: Europe was behind in the cycle.
- Variable-rate mortgages are reviewed by the Euribor, so each rise reaches the payment at the next review.
On 1 February 2023 the US Federal Reserve raised interest rates by just a quarter point, a more moderate step than the previous ones. The next day the European Central Bank raised them by half a point and announced that it would make another equal rise in March, leaving its next move in no doubt.
Two of the world’s most influential central banks were thus showing different paces in the face of the same problem, inflation. The difference mattered to anyone with debts or savings in euros: while the United States seemed to be approaching the end of its cycle of rises, in the euro area the path was not yet over. For a company operating in both currency areas, the interest-rate gap can also affect the euro-dollar exchange rate, a factor that influences import prices and exporters’ margins.
Two different paces
Central banks raise interest rates to cool demand and slow prices. By making credit more expensive, they discourage consumption and investment financed with debt, and thereby ease pressure on prices. It is a powerful instrument, but its effect is slow and uneven: it takes months to pass through the whole economy.
The Federal Reserve was easing its pace, while the ECB kept a faster one and gave a clear signal about its next move. That signal, known as forward guidance, helps markets, companies and households anticipate the cost of money, although it is never a promise: decisions depend on how the data evolve. As long as the forward guidance stands, companies can use it as a reference for their interest budgets, always with the caution of reviewing them if inflation or activity data change the picture.
Europe behind in the cycle
Europe was behind the United States in the cycle. When an economy starts raising rates later, it also takes longer to complete the path, and its households and companies feel the effect with a delay. The ECB had begun its cycle of rises later and still had some way to go.
For European companies, that meant the cost of financing would keep rising for a few more months. Credit lines, variable-rate loans and refinancings planned for that year were going to be done in a more expensive environment than in previous years, and it made sense to reflect that in cash budgets. For small and medium-sized firms, which tend to be financed through working-capital lines tied to an index, the effect is immediate: each additional point of cost reduces the margin of a business that is already working with little cushion.
What it means for mortgages
For Spanish variable-rate mortgages, the worst of the reviews was still to come. These mortgages are reviewed by reference to the Euribor, which reflects expectations for ECB rates, so each rise passes through to the monthly payment at the next review, which usually takes place every six or twelve months depending on the contract.
That means the effect arrives in stages: someone whose mortgage was reviewed a few months ago has not yet felt all the later rises. It is worth checking in the contract when the next review falls and which reference applies, and asking whether the family could take on a clearly higher payment for a while. A timely conversation with the lender can open up options, such as extending the term or fixing the rate on part of the loan, which after the review are harder or costlier to obtain.
Anyone with variable-rate financing would do well to simulate payments at higher rates and talk to their lender in good time.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
