Yesterday the Europe Bank decided to lower its most important interest rate, the Europe Bank interest rate, from 0.75 to 0.5 percent. A reduction in the Europe Bank interest rate usually affects the mortgage and savings rates. However, analysts expect that now is not so bad. Jude Fawley explains exactly what the Europe Bank interest rate is and why it is expected that the effect of the interest rate cut will be better than expected.
The Europe Bank interest rate is the rate at which banks in Europe can borrow money from the Europe Bank
The reduction of this interest rate means that from now on banks can take out a loan at the Europe Bank for 0.5 percent interest. So that is a cheap way for banks to get money. Many banks translate this to the consumer in the form of lower loan and mortgage rates. In that case, it becomes cheaper for consumers to borrow from a bank. A negative effect for consumers is that savings rates will fall. Because banks can borrow cheaply from the Europe Bank, they need consumers’ savings less badly.
Effect of Europe Bank interest on savings rates
However, analysts expect that the effect on savings rates will be better than expected this time. This is because banks currently need consumers’ savings very much, among other things, to be able to finance the large mortgage debt of the Dutch. This is namely the largest in all of Europe. To finance these outstanding mortgages, banks use the money from savers. However, this savings is not sufficient to finance all mortgages.
For this reason, banks come to fellow banks in Europe and investors. But since house prices have been falling sharply lately, investors and other banks are reluctant to invest in Dutch mortgages. This ensures that banks become more dependent on savers’ money for financing mortgages. As a result, they cannot reduce savings interest rates too far.
Effect of Europe Bank interest on mortgage interest
A reduction in the mortgage interest rate is also not very obvious. The current crisis on the housing market ensures that banks are not eager to provide mortgages. Falling house prices, the increasing number of payment problems with regard to mortgages and rising unemployment create uncertain situations. Banks run a greater risk that people will no longer be able to pay their mortgages. If this is the case, a forced sale ultimately does not provide the bank with enough to cover the outstanding mortgage debt. Banks translate these risks into a higher risk premium in their mortgage interest.
So it is a bit premature to expect a big fall in mortgage interest rates now. Mortgage interest rates have been falling slightly in recent months, but due to the increasing risks involved in providing mortgages, the fall will remain limited for the time being.