The ECB pauses

On 26 October 2023 the ECB left rates unchanged for the first time since July 2022, after ten consecutive rises. It was the first breather after more than a year of tightening, although the level of rates remained far above that of then.

The decision was well received, but it needs to be interpreted precisely. It did not announce a change of trend, but a halt to assess the accumulated effects of the earlier rises. For those with debts or savings linked to rates, the message was one of short-term stability, not immediate relief. For those with a variable-rate mortgage, the pause meant that the Euribor stopped receiving the push of expected new rises, although it would continue to reflect the level reached and expectations for the following months.

The first breather

That halt was the first breather after a long period of tightening. A breather is not a retreat: the cost of money was stabilising, but at a level still very high compared with a few years earlier.

The effects of monetary policy reach the real economy with a delay, so stopping makes it possible to see how far the rises already made have slowed demand and prices. It is a prudent decision that also recognises that overshooting can have costs for growth and jobs, and so central banks usually weigh each step carefully. Pauses are a normal part of how central banks operate, adjusting the pace according to the data. Interpreting them as the announcement of an immediate change of course is one of the most frequent confusions among observers.

The market’s question

The market was starting to ask when cuts would come. A pause is not a cut: it means the central bank considers the current level sufficient to curb inflation and wants to observe its effects. Cuts, if they come, will depend on how prices and the economy evolve.

Market expectations can run ahead of decisions, but they are not always right. Whoever took financial decisions on the assumption of immediate cuts risked being caught out if the data obliged the central bank to hold rates for longer. The sounder approach is to test plans against several scenarios. The central bank’s message in the weeks following a pause is as important as the decision itself, because it indicates whether the next likely move would be a rise, a prolonged hold or a future cut. Meanwhile, the real economy shows the accumulated effects: more caution in consumption, less demand for credit and less affordable housing, factors that influence the evolution of prices and employment.

Mortgage, savings and debt

For those having to choose between a fixed or variable mortgage, or between repaying and investing, the calculation changed. With rates at a high, a fixed mortgage secures the payment but locks in a high cost; a variable one could become cheaper if rates fall, but carries uncertainty.

Repaying debt offers a certain interest saving, while investing requires taking on risk. These are personal decisions best simulated with real data and with advice, taking into account the liquidity needed, cancellation costs and each person’s horizon. There is no single answer, but there is a method: put the figures on the table. If a fixed-rate mortgage is chosen, it is worth comparing the rate with the market, the fees for changing terms and the remaining term, because the saving in uncertainty has a price that should be weighed calmly. And for anyone with surplus liquidity, the question is whether to repay debt, keep a reserve or look for other alternatives, which depends on the cost of the debt, the liquidity needed and each person’s risk profile.

With high rates, every financial decision calls for more calculation than intuition.

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