The bankruptcy of the SVB leads the market to expect that the central banks will reduce the rate of rise in interest rates
He one year euriborthe index to which most of the variable rate mortgages in Spain, it has dropped significantly this Tuesday compared to what is usual, from 3.858% to 3.509% in daily rate, its lowest level since February 13. The decrease responds to the intervention of the Silicon Valley Bank (SVB) in the United States, which has led the market to expect that the central banks have to reduce the rhythm of rate hikes of interest to combat the inflationgiven the risk that said tightening of monetary policy could cause the fall of other entities banking or even a financial crisis.
“Following the collapse of SVB over the weekend, it is likely that the fed adopt a more prudent approach when it comes to raising rates”, Vincent Vinatier, portfolio manager at AXA Investment Managers, has managed to summarize in a note. Some analysts, thus, point out that the Federal Reserve could raise rates in its meeting of the week that comes in 25 basis points -or even leave them unchanged- from the current level (4.5-4.75%), instead of the 50 basis points which was expected until a few days ago. They also anticipate that it may moderate the rises later. It is this expectation that explains the fall of the euriborsince this index (which measures the average rate at which European banks lend to each other), tries to anticipate the movements of monetary policy.
The reason for this change in expectations is that the fall of the SVB was precisely due to the sharp rise in rates officials, although the main cause is constituted by mistakes his managers and the lagoons of the normative and the supervision American bank. The Californian bank, very focused on the niche of clients of start-up tech companies more than doubled deposits since the pandemic and allocated those resources to buy public debt of the long-term US Treasury (50.6% of its assets at the end of 2022: 99,580 million dollars). The problem is that when interest rates rise, the interest on public debt also rises but its price goes downwith which the bank found itself with assets that have lost a good part of their value with respect to the price it paid for them, which caused it to huge latent losses which began to materialize when clients began to withdraw deposits in bulk.
ECB pending
In the case of the euro zone, it seems less likely that the European Central Bank (ECB) Don’t meet your highly anticipated rise of 50 basis points at the meeting this Thursday, from the current 3%. The opposite could sift a shade about the situation of Bank System of the continent, when the message that the authorities are trying to send is that their situation Has nothing to do with which it has caused the fall of the SVB. What there are more doubts about is the messages that its president can launch, christine lagarderegarding the next steps that the institution will take.
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After the fall of CVB, the market has revised downwards its very changeable expectation how far the ECB could raise rates. But not all analysts agree. “The ECB should also take into account that data from economic activity have been slightly higher and that the Underlying inflation is at all-time highs. This requires a policy more restrictive. Beyond this meeting, the ECB may try to deal with uncertainties without offering clear guidance on future decisions. Instead, they will emphasize the dependency of the data, and will grant the pause option before too long if the situation worsens,” said Paul Diggle, Abrdn’s chief economist.
Be that as it may, the Euribor monthly average so far in March it rises to 3.8401%, above the 3.534% in February and well above the -0.237% in March of last year. This implies that the mortgage payments that it is time to review with the final data for March will suffer strong increases. The current monthly average would imply for a 24-year mortgage of 150,000 euros with a rate of Euribor plus 1% going from a monthly installment of 570 euros to paying 881, that is, 311 euros more per month and 3,732 euros more per year. For a credit of 300,000 euros with the same characteristics, the increase will be from 1,140 to 1,763 euros: 623 euros more per month and 7,476 euros more per year.