Panayiotis Rougalas
Although the Governing Council of the European Central Bank decided Thursday to keep its three key interest rates unchanged, the Euribor reference rate has already risen at a noticeable pace over the past 20 days. The war in the Middle East has clearly increased uncertainty and is putting pressure on inflation, leading to higher costs for loans in Cyprus that are tied to Euribor.
More specifically, Euribor has increased by 20 basis points since the start of the war just over 20 days ago. This increase will affect loans linked to the rate, with the impact felt immediately in contracts based on short-term Euribor, such as the three-month rate.
To understand the scale of the impact in Cyprus, about 40 percent to 45 percent of all loans are tied to Euribor. Depending on the borrower’s contract, the rate is calculated over different time frames including one week, one month, three, six, and twelve months.
If the timing of recent increases happens to coincide with a borrower’s reset period, that borrower will see higher monthly payments right away. If the upward trend continues and the war persists, a larger share of that 40 percent to 45 percent will experience increases. At this stage, only part of that group is affected. A 20 basis point increase translates to roughly €200 more per year.
The ECB is watching closely
In its statement accompanying Thursday’s monetary policy decisions, the ECB emphasized that the war in the Middle East has significantly increased uncertainty surrounding the economic outlook. This creates upward risks for inflation and downward risks for economic growth.
The ECB noted that the conflict will have a strong short-term effect on inflation through higher energy prices. Its medium-term impact will depend on how intense and how long the conflict lasts, as well as how energy prices feed into consumer prices and the broader economy.
The central bank expects incoming data in the coming months to help policymakers better assess how the war will influence inflation and related risks.
“The Governing Council is closely monitoring the situation, and its data-dependent approach will guide appropriate monetary policy decisions,” the ECB said. Interest rate decisions will be based on the outlook for inflation, the risks surrounding it, incoming economic and financial data, underlying inflation trends, and how strongly monetary policy is transmitted through the economy.
Borrower behavior is changing
Recent data on average interest rates from monetary financial institutions show that the share of new home loans to households with variable rates is now lower than the Eurozone average and has been declining sharply in recent years.
This share has fallen from nearly 100 percent in early 2022 to 11.6 percent today, which is below the Eurozone median. One reason may be the growing use of loans that begin with fixed rates for the first few years, typically three to five years, before switching to variable rates.
This shift suggests that borrowers are becoming more cautious about interest rate risk, a trend banks should consider in their risk management strategies.
At the same time, the share of new loans to households and non-financial companies with variable rates has also declined and now compares favorably with the Eurozone. It has dropped from nearly 100 percent in early 2022 to 64 percent today, again below the Eurozone median. This change may be influenced by the same factors and should also be considered in bank risk management.
Different maturities
Euribor is a benchmark interest rate for unsecured lending and is calculated across several maturities including one week, one month, three, six, and twelve months. It is administered by the European Money Markets Institute.
To comply with EU benchmark regulations, the institute defines Euribor as the rate at which banks in EU and European Free Trade Association countries can borrow funds in wholesale markets without providing collateral.
Euribor uses a hybrid methodology. This approach relies as much as possible on actual transactions in the unsecured market, while also using model-based estimates drawn from related markets when sufficient transaction data is not available.
