Insight & Analysis

‘Interesting’ times ahead

Published: Aug 2022

With the era of negative interest rates in Europe at and end for the foreseeable future, corporates will be keeping an eye on one of the key euro borrowing benchmarks.

2022 to 2024 on a road

Euribor or the euro interbank offered rate is based on the average interest rates at which a panel of European banks borrow funds from one another at maturities from one week to 12 months and is a key reference rate for products such as interest rate swaps and futures as well as savings accounts and mortgages.

In mid-July, three-month Euribor rose above zero for the first time in more than seven years despite starting 2022 at -0.5% as the European Central Bank (ECB) signalled the end of a lengthy period of negative interest rates.

According to treasury consultancy Zanders, as of Monday 1st August the six-month euro interbank offered rate was up by three basis points to 0.66% compared to previous business day.

The longest duration Euribor (12-month) averaged 0.992% during July compared with 0.852% in June. To put this in perspective, this time last year the monthly average rate was -0.491%.

The pain of an increase in Euribor is being felt all over Europe. The head of the financial market department at SEB Banka in Latvia explains that one-year Euribor had already moved into positive territory in April and at 0.6% equated to an extra €300 per year on a €50,000 loan. She estimates that the three-month rate could rise above 1.50% next year.

These forecasts are based on expectations that the ECB will increase rates further in the coming months. BNP Paribas expects further 50bp hikes in both September and October and 25bp from December. The bank’s year-end forecast is now 1.25% and it has maintained its end-2023 forecast of 2%.

A research note published by ING last week noted that the ECB has barely started its hiking cycle and has just done away with years of negative interest rates policy. With the inflation peak in this cycle likely to be ahead rather than behind us there will be pressure on the ECB to keep up its hawkish rhetoric.

According to the note authors, some of the tightening of financial conditions the ECB is trying to deliver with its hikes is also happening with markets bracing for a recession. They suggest that the widening of the gap between Euribor and €STR (the benchmark for contracts of less than a week in duration) shows that tighter financing conditions are feeding through to various corners of the economy and of markets.

Although UK rates are set by the Bank of England rather than the ECB, Barclays is one of the banks whose rates are used to calculate Euribor so rate developments in the UK are relevant.

Paul Hollingsworth, Chief European Economist at BNP Paribas Markets 360 reckons a combination of upward inflation surprises, elevated inflation expectations, and relatively resilient growth data means an increase to a 50bp rate hike in August now looks more likely than not. Thereafter, the bank forecasts 25bp hikes for September, November and December, taking the UK bank rate to 2.50% by the end of 2022.

Meanwhile, the European Money Markets Institute is developing Efterm, which will become Euribor’s fall-back rate and is designed to measure the average expected ECB euro short-term rate (€STR – the average rate at which banks borrow overnight deposits from other financial institutions, including non-banks) from one week to 12 months.

In March, the European Securities and Markets Authority (ESMA) issued a call for expression of interest from administrators developing or planning to develop €STR-based forward looking term structures as a fall-back in Euribor-linked contracts.

ESMA had suggested that all presentations would be published on its website after the working group meeting of 17th June, although they had not done so by the time this article was published.

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