Energy price rise fuels inflation as Euribor climb persists

Euribor rates continue to rise as the US-Iran conflict fuels uncertainty, pushes up various energy prices and keeps inflationary pressure high, ERR reported. The increase has so far had little effect on demand for loans.

The six-month Euribor has risen to 2.765 percent in the past two weeks, up from 2.637 percent. The 12-month Euribor has remained close to 3 percent, at times exceeding that level.

The rise in Euribor rates of different maturities is clearly driven by expectations that price growth in the euro area will accelerate, LHV macro analyst Triinu Tapver told ERR. She said the increase was linked to higher energy prices in recent weeks.

“For Europe, especially large economies such as Italy and Germany, the price of natural gas, which has risen to 69 euros per megawatt-hour, is particularly important. This means higher energy bills during the autumn and winter heating season and, as a result, higher production costs and more expensive goods,” Tapver said.

Higher inflation and energy prices are also affecting the European Central Bank’s interest-rate policy, said Swedbank chief economist Tõnu Mertsina.

“Although our forecast is that the ECB will raise its interest rate only in September and leave rates unchanged next year, markets see a greater likelihood of further monetary policy tightening. This has also affected the movement of Euribor,” Mertsina said.

He added that stronger economic activity, a tight labour market, higher defence and other public-sector spending, and investments related to the green transition also point to rising inflation. Financial markets therefore expect the central bank to raise interest rates further in the coming quarters, Mertsina said.

Tapver said that because markets do not follow the ECB’s monetary policy decisions as closely, the movement of Euribor rates is influenced more by inflation forecasts for the coming months than by the ECB’s decisions themselves.

Markets expect rates to remain high

The 12-month and six-month Euribor rates are not directly linked, meaning the annual rate does not necessarily show which direction the six-month rate will take. However, the 12-month Euribor reflects the market’s assessment of where interest rates could be in a year and can therefore provide some indications.

Tapver said the 12-month Euribor remaining close to 3 percent indicated that the six-month rate would continue moving in that direction.

“The 12-month Euribor is generally more stable and always reacts to events more slowly. The current rise in the 12-month Euribor could therefore be interpreted as the market expecting interest rates to remain higher next year as well. The current situation in the Strait of Hormuz also suggests that the six-month Euribor will continue rising towards 3 percent,” Tapver said.

Mertsina disagreed.

“It is a fairly strong signal, but not a firm forecast. I would not draw a definite conclusion from the 12-month Euribor that the six-month Euribor will soon exceed 3 percent. First, the market expectation of further ECB tightening would have to materialise. Our forecast is that the ECB’s deposit facility rate will rise to 2.5 percent in September and remain at that level next year,” Mertsina said.

The six-month Euribor is currently more than 52 basis points, or 0.52 percentage points, above the central bank’s interest rate. Over the past 10 years, the average difference has been only 15 basis points, Mertsina said.

“So, the six-month Euribor is already moving towards 3 percent, but exceeding 3 percent soon is not yet an inevitable outcome,” he said.