The Fed pauses; the ECB does not

On 14 June 2023 the Federal Reserve held interest rates for the first time in more than a year, after ten straight rises, though it signalled there might be more. The next day, the ECB raised rates by a quarter point again.

The resulting picture was of two central banks at different points in the same cycle. In the United States, the pause allowed the accumulated effect of the rises to be assessed; in Europe, the ECB considered that there was still work to do. For anyone with debts or savings in euros, what mattered was that the cost of money was still rising in the euro area. In any case, the decisions of each central bank do not happen in a vacuum: each watches its own data on prices, employment and growth, and it is normal for the paths not to coincide, especially when economies are going through different phases.

A pause with nuances

The pause after ten consecutive rises was not an announcement of the end: the Fed itself signalled there might be more rises. A pause allows the effect of what has been done to be assessed without treating the cycle as closed.

The effects of monetary policy take time to show, and stopping for a moment makes it possible to see how prices, employment and credit evolve before deciding the next step. That is why a pause is not the same as a cut: it is a way of gaining information while keeping open the possibility of raising again. The Fed put it clearly: holding rates does not mean the job is done. That caution is a constant among central banks, which prefer to err on the side of prudence rather than declare victory too soon.

Europe kept rising

The next day, the ECB raised by a quarter point again. In Europe rates kept rising, and the two sides of the Atlantic were at different points in the monetary policy cycle. That difference matters because the euro area has its own rhythms of inflation and growth.

For Europeans, this meant they could not be guided only by what the Fed did. The decisions in Frankfurt are those that determine the cost of money in euros, and the market read every gesture of the ECB to anticipate its next steps. Following both central banks is useful, but what is decisive for a euro mortgage is what the ECB does. Companies with sales in dollars and costs in euros, or the other way round, also follow this divergence closely, because the different paces of the central banks can move the exchange rate and alter export margins.

The effect on mortgages and SMEs

The Euribor continued to rise and bank financing for SMEs was getting more expensive month by month. For families with a variable-rate mortgage, that means higher payments at each review; for companies with debt linked to the Euribor, higher financial costs.

It is worth simulating the impact of further rises, weighing whether it pays to fix the rate on part of the debt and consulting the lender before the next review. Fixing the rate gives certainty about the payment, although it usually carries a higher initial cost, and the decision depends on each person’s or company’s situation: it should be studied with numbers and with the adviser. A useful reference is to calculate how much the annual payment on a loan or mortgage would increase for each additional half point of interest, and to check whether the budget could bear it without cutting other essential spending. And if fixing the rate on part of the debt is being considered, it is important to compare not only the initial rate but also fees, flexibility to repay and the consequences of any early cancellation.

While the ECB keeps raising, the prudent course is to budget as if rates were going to stay high.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.