The European Central Bank (ECB) has announced a further cut in eurozone interest rates at its last meeting of 2024. This is the fourth cut so far this year and the third in a row.
As on previous occasions, the highest monetary and financial authority has decided to lower the price of money by 25 basis points, so that the official reference rate (which has been the deposit rate since September) will stand at 3% as of 18 December. This is the lowest level since March 2023. From the same date, the main refinancing rate will fall to 3.15% and the marginal lending rate to 3.4%.
Although in recent weeks a 50 basis point cut was not ruled out, given the worsening economic indicators in the region of the common currency and the impact that Donald Trump’s trade strategy could have on his return to the White House, the Guardian of the euro has finally opted for its usual prudent stance and waited for further evidence that the disinflation process will go further before accelerating monetary easing.
As the decision had already been discounted by the market, the impact of this new drop in interest rates will be limited, although the forecast of further cuts in 2025 will continue to support an improvement in the mortgage market and will put more pressure on the housing market, currently marked by a strong mismatch between the scarce supply and a demand that continues to rise. In the coming months we expect further falls in the Euribor, further adjustments in mortgage supply by banks and an additional boost to an already unbalanced residential sector.
Cheaper mortgages
A drop in interest rates in isolation has little effect on the market, but it is worth bearing in mind that the price of money has fallen by one percentage point in the last six months and is expected to continue to fall in the short term, which is allowing, on the one hand, an improvement in the conditions of fixed and mixed rate mortgages; and, on the other, a fall in the Euribor, the reference indicator for variable rate loans, which is driving down the monthly repayments paid by mortgagors. There are currently around 3.2 million families who have taken out variable rate mortgages.
According to Juan Villén, general manager of idealista/hipotecas, ‘the ECB continues with its roadmap of normalising rates, supported by the economic fragility of Germany and France and what for the moment seems to be controlled inflation. This is good news for those looking for a mortgage, although it is true that many banks were already discounting this drop in their mortgage offers, and also for those with variable mortgages, as their downward revisions will be stronger.
Julián Salcedo, PhD in Economics and president of the Foro de Economistas Inmobiliarios, also believes that ‘the ECB’s lowering will bring more reductions in the Euribor and with it an improvement in mortgage offers, reopening the war between institutions, bearing in mind that it is the financial product most used by banks to improve their results’. And he adds that ‘if the drop in rates is passed on to individuals and companies and financing flows, the great beneficiary is the economy in general’.
Euribor will continue to fall, but at a slower pace
The reference indicator for the vast majority of variable mortgages in Spain began its downward trend last April and is currently at its lowest level in more than two years. It ended November with a monthly average of 2.506%, the lowest level since September 2022 and a far cry from the 4.16% it reached in October 2023.
And the average so far in December is around 2.4% (six tenths of a percentage point below the ECB’s official reference rate), which anticipates further reductions in mortgage repayments linked to this indicator that will be revised in the near future.
As the EAE Business School professor reminds us, ‘the Euribor does not correspond to ECB interest rates, but it is affected by them’. Therefore, insists Juan Carlos Higueras, ‘the more the ECB lowers rates, the more the Euribor will fall’.
For his part, Santiago Carbó, director of Financial Studies at the Savings Banks Foundation (Funcas), stresses that the big beneficiaries of the rate cuts, in addition to those who are going to take out a mortgage, are those who already have a variable rate mortgage, who ‘are logically hoping that there will continue to be further reductions to alleviate the burden that rose quite significantly in 2022 and 2023’.
Carbó draws a scenario with a falling Euribor, although he warns that ‘there will come a time when it will not fall as fast as it has fallen so far’. The proof is that banks’ current forecasts suggest that the Euribor has room to fall in the coming months to 2.1%, while the average for 2025 could be 2.5%, as long as the ECB continues to lower rates.
‘However, at the end of next year, if there is no great weakness in the European economy, the distance between the Euribor and the reference interest rate will be small, not like now, which is substantial’, stresses Gonzalo Bernardos, professor of economics and director of the Master’s Degree in Real Estate Consultancy, Management and Promotion at the University of Barcelona (UB).
Readjustment of mortgage offers
In the case of mortgage offers, in the final stretch of the year several banks have announced an improvement in the conditions they have been applying until now. This is the case of Openbank, the Santander Group’s online bank, which has lowered its fixed mortgage for the purchase of first and second homes by 10 basis points, bringing the interest rate to 2.66% with maximum bonuses. Bankinter has also improved its offer, although in this case the cut has been two tenths of a point, leaving the interest rate at 2.79%.
According to data from the idealista/hipotecas comparator, there are currently several banks offering fixed mortgages with a rate of between 2.6% and 2.8%. In addition to Openbank and Bankinter, Santander, BBVA, CaixaBank, Sabadell and Cajamar are also on the list.
But forecasts suggest that, in the coming months, as long as the ECB continues to lower the price of money, offers will continue to adjust to 2%-2.5%, although there could be more competitive offers. This is a level that economists consider very attractive for consumers.
As economist Miguel Córdoba argues, the ECB’s rate cut benefits ‘those who already have a variable-rate mortgage, obviously. And also those who are going to take out a new mortgage, because they will be able to do so more cheaply and, if they are smart, they will do so at a fixed rate of 2.5%, guaranteeing themselves a low rate for 30 years’.
Ultimately, as the Funcas executive comments, ‘many people consider that rates are still expensive, but as they go down they can join the market, because they may be interested in taking on debt when rates are sufficiently low’.
While waiting to see further improvements in the mortgage market, the statistics are already showing an upturn in fixed-rate loans. According to the INE, 61.4% of mortgages registered in September were signed at a fixed rate, the highest level since May 2023.
More pressure on the housing market
Economists consulted by idealista/news state that the demand for housing currently already far exceeds supply, although they recognise that lower interest rates are an additional pressure factor that will ultimately continue to push up prices. Above all, if banks relax their criteria when it comes to granting financing for property purchases.
In this sense, the president of the Foro de Economistas Inmobiliarios believes that lower rates ‘per se’ will not boost demand for housing. ‘Demand is already very strong, more than double the supply of new housing, so it is the low supply that is regulating prices, the supply of new housing would have to double for it to have an impact on prices. In reality, it depends on banks relaxing their criteria for granting more mortgages, which in turn is related to job creation and stability and the expectation of wage rises, in order to improve the purchasing power of buyers,’ explains Julián Salcedo.
Santiago Carbó also believes that ‘the problem we have in Spain is that there is no supply of housing in certain areas, precisely those with the highest demand, so the tension in prices is going to continue’. According to the director of Financial Studies at Funcas, ‘financial issues can help to cause tensions’, although it is not the determining factor or the basic problem.
Even so, many economists believe that more accessible financing can accelerate the problem. One of them is Antonio Pedraza, president of the Financial Commission of the General Council of Economists of Spain, who considers that ‘it is the most logical thing to do. It puts pressure on demand in the face of a sterile supply’.
Juan Carlos Higueras, professor at the EAE Business School, agrees, who believes that the market tension is mainly due to a lack of supply, but points out that ‘obviously, lowering rates helps to widen the gap between supply and demand and pushes prices up’.
Bankinter analysts also defend this thesis. ‘Looking ahead to 2025, we foresee further rate cuts by the ECB, which should act as a stimulus for house prices,’ they argue in their latest real estate forecasts report. In fact, the entity has revised upwards its forecast on how housing prices will evolve in Spain, which could close 2024 with a rise of more than 8% (compared to 6% estimated until now) and 5% in 2025 (compared to 4% previously). In 2026 it expects prices to rise by 3%, also above inflation.
Meanwhile, at UVE Valoraciones they point out that the fall in interest rates will reactivate the real estate market and will lead to an increase in the proportion of homes purchased with financing. The company, which has analysed INE data, stresses that 65.2% of homes sold in the last 12 months at national level were purchased with a mortgage, and expects this proportion to grow ‘significantly’ in the coming months, especially in large cities.
Coincidence or consequence, what is certain is that the Property Registrars noted ‘a powerful recovery’ in the real estate market in October. According to their advanced data, the sale and purchase of homes soared by 47.7% year-on-year in the tenth month of the year (with more than 68,000 transactions) and mortgages, by 62.9% (almost 52,000 loans). Data from the registrars show increases in both variables throughout Spain and that the volume of mortgage loans accounted for 76% of housing transactions, eight points more than last year.
Furthermore, there are economists such as Gonzalo Bernardos who predict an increase in home sales and purchases in Spain during 2025. In his opinion, lower interest rates are going to make ‘banks want to compensate for what they are no longer earning due to the unitary margin of interest rates through a large increase in credit.
This increase in credit will facilitate the purchase of homes by the lower-middle class and will contribute decisively to the fact that in 2025 housing prices will rise’ strongly (more than 10%, according to his forecast).
Bernardos predicts that next year the housing market will reach a level of sales unseen since 2007, with more than 800,000 transactions. And he anticipates that there will be record transactions in the used housing market, which could reach 725,000 units. ‘We have never exceeded 700,000 sales of used homes and this will be a situation that will undoubtedly heat up the market a lot and both new and used housing will see price increases,’ the economist explains.
The economist Miguel Córdoba, for his part, also expects an increase in residential prices, although he does not believe that the drop in interest rates will be the determining factor. ‘Prices are rising because there is not enough supply. There is a lack of one million homes for the three million that the Spanish population has increased by in the last 15 years. In stressed areas, the rise will continue’, he argues.
Rates will fall further, but there are risks
Experts assume that 2025 will bring further rate cuts, although the ECB will continue to adopt a cautious stance at its forthcoming meetings. Broadly speaking, the consensus thesis is that the price of money will move between 1.75% and 2.5% over the next year, compared with 3% at present. This is the level that the market considers to be ‘neutral’, although everything depends on the evolution of inflation, geopolitical tensions and economic activity.
Julián Salcedo argues that the choice is between growth or inflation. ‘Inflation in the euro zone is more or less under control, at 2.3% as of November (responsible for services), but it has picked up in the last two months and core inflation is at 2.7%. Growth remains sluggish, in Germany in expectation of the federal elections on 23 February, and how the political crisis in France evolves.
Therefore, and if there are no unforeseen events such as armed conflicts, a tariff war, a rise in inflation, etc., rates should be around 1.75%-2% by the end of 2025, according to the president of the Real Estate Economists Forum, who believes that this is ‘a good timetable. Any further or faster cuts would overheat the economy and push up inflation, which is undesirable’.
The base scenario, as Santiago Carbó stresses, is that the ECB continues to lower rates to reactivate the economy ‘because Europe needs it. The eurozone’s economy is much more discouraged and much less strong than that of the US. In his case, he estimates that they will be at least 2.5%, with the aim of ‘eliminating the financial restriction that has existed until now’.
The director of Financial Studies at Funcas also recalls that, in addition to the eurozone itself, future decisions will also be influenced by what happens on the other side of the Atlantic, so that the monetary movements of the US Federal Reserve are seen as key to the ECB’s future monetary strategy.
Similarly, the president of the Financial Commission of the Spanish General Council of Economists affirms that future rate cuts ‘will depend not only on the evolution of inflation, but also on favouring a Germany that is currently experiencing negative growth, something that affects the rest of the EU’. In addition, he stresses that ‘the geopolitical scenario is very complicated’ with an increase in energy prices that harm imports from Europe, while the Fed has slowed down rate cuts, which, together with Trump’s victory in the US, strengthens the dollar. ‘These are factors to monitor because they affect inflation, a key parameter for the ECB’s policy,’ comments Antonio Pedraza.
For his part, the director general of idealista/hipotecas warns that ‘the storm clouds on the horizon for energy prices in winter, the strength of the dollar, wars and future US trade policy could cause inflation to rise and the consequent halt in this downward trend in interest rates’.
Like Juan Villén, at EAE Business School they explain that ‘inflation is still above the ECB’s target and although they are cutting rates so as not to stifle the economy, it seems prudent to do so in a staggered manner to prevent inflation from getting out of control again. According to its statutes (its mandate), the ECB pays more attention to inflation than to economic developments. And if inflation resists coming down, rate cuts could slow down. We will see if the coming protectionist wave affects prices, if there are increases in the cost of energy due to geopolitical tensions, all of these are aspects that could affect inflation and, therefore, the rate cut schedule’, clarifies Juan Carlos Higueras.
In any case, economist Miguel Córdoba concludes that ‘the sooner a stable interest rate framework is set, the better for economic activity. There are too many risks and uncertainties of all kinds for us to have to keep our eyes on the ECB in case it moves its monetary policy’.
The ECB’s new macro picture
This last ECB meeting of 2024 not only aroused expectation because of the interest rate decision, but also because the body chaired by Christine Lagarde had to update its macro picture, i.e. what it expects from inflation and economic growth in the medium term.
After the update, the fourth of the year (there is one per quarter), the Guardian of the euro assures us that ‘the disinflation process continues to progress. Eurosystem staff estimate headline inflation to average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027, when the extended EU emissions trading scheme starts to be implemented. Inflation excluding energy and food is forecast to average 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and 2027’.
According to the official statement, ‘most indicators of underlying inflation suggest that inflation will stabilise steadily around the Governing Council’s 2% medium-term objective. Domestic inflation has declined, but remains elevated, mainly because wages and prices in some sectors are still adjusting to the previous strong rise in inflation with a considerable lag.
The ECB also adds that ‘financing conditions are easing, as the recent interest rate cuts agreed by the Governing Council are gradually reducing the cost of new credit for firms and households’, although it considers that ‘they remain tight, as monetary policy is still restrictive and past interest rate hikes continue to be passed through to the outstanding amount of credit extended’.
All in all, the agency confirms that it expects a slower economic recovery than in the September projections. ‘Although growth picked up in the third quarter of this year, sentiment indicators point to a slowdown this quarter. Overall, the economy is projected to grow by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The estimated recovery is based mainly on rising real incomes, which should allow households to consume more, and firms to increase investment. Over time, the gradual fading of the effects of monetary policy tightening should support a recovery in domestic demand,’ the ECB argues.
Finally, the ECB insists that it is ‘determined to ensure that inflation stabilises in a sustained manner at its 2% medium-term objective’, and that it will continue to apply ‘a data-dependent approach, where decisions are taken at each meeting, to determine the appropriate stance of monetary policy’.