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Anyone in Cyprus waiting for mortgage payments to come down may have to wait a little longer.
European Central Bank board member Isabel Schnabel has warned that interest rates will need to rise again because inflation is unlikely to return to the ECB’s 2% target under current conditions.
The continuing conflict in the Middle East has kept energy prices high, while the eurozone economy has performed better than expected. Together, Schnabel says, those factors increase the risk that inflation will remain above 2% for an “extended period.”
“At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary,” she told Bloomberg in an interview published Wednesday.
In central-bank language, “further tightening” usually means raising interest rates.
That does not mean a rate increase has already been decided. Schnabel is one member of the ECB’s Executive Board, and decisions are taken by its Governing Council. The ECB has also said it will examine the latest economic figures before each meeting rather than promise a particular path in advance.
Still, the warning matters.
Reuters reported that ECB policymakers are leaning toward another increase at their September meeting to contain inflation linked to the Iran war, although there appears to be little appetite for a longer series of increases.
The ECB raised borrowing costs in June for the first time in almost three years. In July, it left its three main rates unchanged, with the deposit rate at 2.25%, the main refinancing rate at 2.40% and the marginal lending rate at 2.65%.
For borrowers in Cyprus, the important question is whether their loan has a fixed or variable rate.
A fixed-rate mortgage will normally remain unchanged for the agreed period. But repayments on a variable-rate loan can move up or down when the rate used by the bank changes. Depending on the contract, that loan may be linked to an ECB rate, Euribor or the bank’s own base rate.
Even a small increase can make a difference over time. On a €200,000 mortgage with 20 years remaining, for example, a rise of 0.25 percentage points could add roughly €25 to €30 to the monthly payment, depending on the starting rate and the terms of the loan.
That may not sound enormous on its own. But it comes at a time when households are already paying more for electricity, fuel, food and other essentials.
Businesses face the same problem. More expensive loans mean higher costs for buying equipment, expanding premises or simply keeping enough cash available to operate. Some may delay investment or pass part of the added cost on to customers.
Schnabel’s concern is that waiting too long could allow high energy costs to spread through the wider economy, affecting wages and the prices businesses charge. By then, she warned, the ECB could find itself “behind the curve.”
Higher rates can help slow inflation by discouraging borrowing and spending. The uncomfortable part is that they do so by making life more expensive for people who already have loans.
For now, nothing changes. But for Cypriot borrowers hoping the worst was over, the message from Frankfurt is clear: do not count on cheaper money just yet.
*With information from Retuers and European Central Bank
