Where do banks see mortgage rates in 2023?

Of Leonida Stergiou

The period from the first increase of the ECB interest rates in July to the second in September is crucial in order to determine the response of the markets and to complete the revaluation of the risk of Greek bonds. Banks and investment firms estimate that the ECB’s uptrend is expected to be completed by mid-end by 2023, with continuous increases to the level of 1.5-2%.

Given that the cost to banks of locking in fixed interest rates depends on the yields on Greek bonds at various maturities, the final interest rate for borrowers is considered difficult to maintain below 6%, with the ECB key interest rate at 1, 5-2%.

At the same time, the 3-month euribor that currently follows the trends of the ECB core interest rate will be around 2%, so that the fluctuations will be around 4% to 5%. Even the 1-month euribor, which is currently moving much lower, around -0.5%, is estimated to start to rise to zero, as the liquidity of support packages will be absorbed by the short-term durations.

Another technical factor is the ECB’s decision on interest rate increases related to the deposit acceptance mechanism. When interest rates were not negative, interbank rates (such as euribor) followed the ECB’s key deposit rate (currently 0%) rather than the intervention rate (currently -0.5%).

Once the excess liquidity is absorbed in the near future, the euribor can return to the previous situation and move in parallel with the ECB deposit interest rate, which will be higher than its intervention rate. This practically means a bigger increase for the floating interest rates that will push upwards and the fixed ones. The estimate of the same executives converges that this process will take about 1-1.5 years.

According to the first estimates of bank executives, there will be a pricing policy, which will keep mortgages with floating interest rates at a lower level by at least 2.5 percentage points, compared to fixed interest rates, in order to have an attractive alternative.

There are already signs of fatigue in the mortgage market with monthly disbursements moving at lower levels than those of consumer loans, but at about the same levels as last year. However, the effects of rising borrowing costs and double-digit inflation are expected to occur after three to four months.

The conditions

In order for this difference of 2-2.5 points to fluctuate around 4-4.5%, the conditions of the basic scenario must be met, which can be summarized as follows:

First, there will be a positive response to the control of inflation – mainly structural, despite the time lag expected between interest rate hikes and subsequent measurements that will show a reduction in inflationary pressures.

Secondly, the ECB’s intervention tool for smoothing out bond market turmoil – mainly in southern Europe – will work effectively or persuade markets.

Thirdly, there will be no further negative development at the geopolitical level and at the front of the energy and supply chain.

Fourth, measures taken at national level and those taken at a pan-European level against the energy crisis will reduce the loss of disposable income.

Fifth, there will be no reversal of the scenario for upgrading the creditworthiness of the Greek economy to an investment level. This factor is quite important, although this upgrade was discounted by the markets and priced in the bond markets. Because only with the official upgrade will the profile and the size of the funds that will invest in the Greek market change, lowering the bond yields.

Any faster and greater normalization of macroeconomic variables, supply chain and markets will limit interest rate increases. Because, due to competition and initial discouragement of demand, banks will try to keep the profit margin low in retail banking – especially in mortgages that are larger (per loan), have a lower risk and are longer lasting. On the contrary, any aggravating factor will push them to higher levels, because at the same time the risk costs increase, but also the prospect of changing the assessment of banks’ prospects from positive today to stable.