Now the euribor forecasts were renewed: There may be a bigger jump than expected

The price of crude oil is now the thing that determines the future interest rate level of the Eurozone. This also applies to the most common reference interest rate for Finnish mortgages, the 12-month Euribor.

The new escalation of the situation in the Middle East raised the price of a barrel of North Sea crude oil quality Brent already to around one hundred dollars this week. The market also considers a barrel price of over 120 dollars possible.

“Oil is now driving interest rates more than the ECB’s speeches. The September interest rate hike is already almost fully priced in. Oil is still the main driver of euro interest rates, and markets are pricing in more second-round inflationary effects as oil prices remain high,” European bank ING:n cork strategy Michiel Tukker commented to Uusi Suomi.

A bigger withdrawal in September?

At its July interest rate meeting on Thursday, the ECB left the policy rates unchanged, i.e. the most followed policy rate, the deposit rate, is still at 2.25 percent. In September, it is expected to rise by 0.25 percentage points to 2.50%, but some economists expect a bigger increase.

One of them is a professor at the London School of Economics, an economist Lorenzo Codognowhich predicts that the deposit rate may rise by 0.5 percentage points in September, i.e. to 2.75 percent.

“The ECB has returned to the base scenario of June, where inflation risks are up and economic activity is down. Uncertainty is indeed very high. By September, if the energy crisis intensifies as I expect and the data is more in line with the risk scenario than the base scenario, the ECB will raise interest rates again, up to 0.50 basis points,” he commented.

According to Codogno, his expectations for the interest rate level at the end of the current cycle are higher than market forecasts, but he does not reveal his forecast. The market is currently expecting 1-2 interest rate hikes from the ECB this year and the deposit rate to settle at 2.75 percent by the end of the year.

Instead, the world’s largest asset management company Blackrockin rescuer Ann-Katrin Petersen says that he thinks the current market forecasts are too harsh.

“The market is pricing in restrictive policy rates for several years, in our opinion it is an exaggeration. Higher energy costs could be passed on to wages and broader prices. However, there is little evidence of this so far. For now, the ECB is walking a tightrope – it remains vigilant about inflation, but keeps its options open,” he commented to Uuudi Suomen.

A price shock may hit Europe

A higher-than-expected increase in the price of crude oil could even mean a severe price shock to Europe.

This is especially the opinion of a financial consulting company of the DeVere Group managing director Nigel Greenaccording to which the new rise in the price of crude oil is already threatening to reverse months of progress in inflation. According to him, this happens exactly at the same moment when the central bankers started to trust that the price pressures will subside.

Green says each new escalation raises the same question: What happens if oil prices stay above $95 for months instead of weeks? According to Green, most investors, let alone central bankers, have not yet familiarized themselves with such a scenario, and now it’s already getting busy.

The ECB Council members’ comments have intensified in recent days. The Governor of the Bank of Finland sits on the Council Olli Rehn and Governor of the Bank of Ireland Gabriel Makhlouf both highlighted the risks of the situation in the Middle East in their blog posts after Thursday’s interest rate decision.

In addition, a member of the ECB Council and Governor of the Bank of France Emmanuel Moulin considers the biggest risk to be the transfer of the rise in oil prices, especially to the prices of services and transport. He emphasized the French In an interview with BFM Businessthat this is exactly what the ECB wants to avoid and to keep an eye on now above all the duration of the energy shock.

Expectations of new interest rate hikes raised the 12-month Euribor this week already above the peak level of the fall of 2024. The interest rate was quoted at 2.993 percent on Friday. Experts expect the 12-month Euribor to break the three percent limit already in the near future.

If the ECB’s interest rate hikes continue after September, the 12-month euribor may already be at four percent at the end of the year, according to forecasts. This would happen if the ECB raises its interest rates more than once this year.