Historically, the 12-month Euribor rate has been higher than the six-month and three-month Euribor rates due to the greater uncertainty involved in long-term economic forecasts. However, since the end of 2023, this trend has reversed.
Henrique Tomé, an analyst at XTB, explains this shift is due to controlled inflation and signs of economic slowdown. It is anticipated that the European Central Bank (ECB) will continue to lower its key interest rates.
“A cycle of rate reductions is expected, resulting in the 12-month Euribor already factoring in lower future rates. The money market assumes that medium-term interest rates will be lower,” he said.
However, Tomé cautioned that economic and geopolitical uncertainty remains high. If rate cuts take longer than expected or inflation accelerates, “the curve could normalize again.”
Similarly, Banco BIG market analyst Marcelo Silva noted that investors “are extrapolating or pricing in that over the next 12 months, a reduction in the ECB’s key interest rates may be necessary,” making the 12-month Euribor lower.
Several factors contribute to this, Silva explained, primarily the economic policies of the United States under Donald Trump and the impacts on economic growth.
“This dynamic won’t change until there is a definition of what Trump’s economic policies will be and their specific impacts on the global economy, and consequently the European economy,” remarked Marcelo Silva.
Henrique Valente, an analyst at ActivTrades Europe, also agreed that the curve inversion “indicates the market expects more interest rate cuts throughout the year.”
“It’s a cyclical inversion, likely to return to normal once interest rates stabilize or a new cycle of hikes begins,” he stated.
As for the Euribor rates’ trajectory, analysts are cautious, expecting a gradual decline but warning that various factors could easily challenge these projections, such as the U.S.-initiated trade war and the situation in Ukraine.
Filipe Garcia, President of Information on Financial Markets, noted that the market anticipates “two to three more cuts in the reference rates” from the ECB, projecting that the six-month Euribor will be at 1.795% on September 30 and 1.725% on December 31.
Last Friday, May 2, the six-month Euribor settled at 2.143%. Meanwhile, the three-month Euribor was at 2.142%, and the 12-month Euribor at 2.045%.
Garcia expressed skepticism that “the ECB will cut rates as much” as many predict, arguing that Frankfurt will likely want to “defend the interest rate as a monetary policy instrument.” However, he still considered that there is no expectation of “the reference rates rising,” suggesting that the Euribor rates should continue to decline.
The Euribor was established with the introduction of the euro on January 1, 1999, as a reference interest rate for the eurozone’s interbank market. Euribor rates are set by averaging the rates at which a group of 19 banks (including Portugal’s Caixa Geral de Depósitos) lend money to one another.
Their value is closely tied to the ECB’s fixed key rates. When the market anticipates that the ECB will raise interest rates, Euribor rates rise; when it expects cuts, the Euribor rates fall.
The Euribor has experienced several historical moments.
In 2008, during the financial crisis, it exceeded 5% at several maturities. Following the ECB’s intervention to lower rates and stimulate the economy, the Euribor fell to about 1% by mid-2009.
In 2015, it reached negative values, reacting to the ECB’s decisions, including significant cuts in key interest rates, to stimulate the economy.
In 2022, the Euribor stopped trading in negative territory, aligning with the ECB’s decisions to increase key interest rates due to rising inflation in the eurozone, a year marked by Russia’s invasion of Ukraine, and began to rise.
In October 2023 (monthly average), the three-month Euribor was trading at 3.968%, the six-month at 4.115%, and the 12-month at 4.160%. From 2024 onwards, with the prospect of ECB rate cuts, Euribor rates began to decrease gradually.
The Euribor serves as a benchmark for financial products, primarily for variable-rate home loans, which are prevalent in Portugal.
If the decline in the Euribor, especially when in negative values, was a relief for those with variable-rate mortgages, the recent rise has significantly increased monthly payments, impacting many families. More recently, the relief has been slight.
According to the latest data from the Bank of Portugal, in February (the most recent available data), 37.5% of total variable-rate home loans were indexed to the six-month Euribor, 32.5% to the 12-month Euribor, and 25.7% to the three-month Euribor.
In the new home loans granted in February, the 12-month Euribor was predominant (representing 46.9% of the total), followed by the six-month rate (44%), while the three-month rate was marginal (5.9%).
