Euribor rates

The European Central Bank continued its interest rate hikes in September with a 0.25 percentage point raise. Rising energy prices driven by the war in the Middle East have also heightened the ECB's inflation concerns over the medium term, and we therefore expect further rate hikes at upcoming meetings. 

In our baseline scenario, the key policy rate will rise to 3% by early next year. However, the markets remain fluid, and there is currently considerable uncertainty surrounding interest rate forecasts. Even the ECB has avoided providing clear guidance on the timing of future hikes.

The ECB’s policy rates influence market rates, such as the Euribor rates, which are familiar to people who have a home loan.

The Euribor rates (Euro Interbank Offered Rates) are reference rates applied in the money markets in the eurozone. They are determined based on the interest at which large eurozone banks can get financing in the money market in euros without collateral.

Despite being based on the European market, few European countries use them as home loan reference rates as frequently as Finland.

“Eurozone countries have different characteristics in many ways. In Finland, variable rates have historically been popular, but in Germany, for example, borrowers favour fixed rates,” says Chief Analyst Jan von Gerich from Nordea.

Finns have a long history of favouring short-term variable rates. The typical reference rate used in home loans is the 12-month Euribor although with rising interest rates, customers have begun to show interest in short-term reference rates as well.

“When you take out a home loan, a variable rate is generally lower than a rate fixed for a long period, so many consider it logical to choose the lower rate. Historically speaking, a short-term variable rate has been slightly cheaper on average than a fixed rate,” says Jan von Gerich.

Reference rates are publicly quoted interest rates, and the values of Euribor rates can be checked on the Bank of Finland’s website.

The benefits of the shorter Euribor rates are typically related to the slightly lower rate they offer initially and to their quicker reactions to market movements when the general interest rate level starts to fall.

“At the time you take out the loan, the 3-month Euribor is often – but not always – lower than the 12-month Euribor. On the other hand, if interest rates start to fall, you will benefit quicker,” says Jan von Gerich.

But one thing applies to all reference rates: it’s impossible to say beforehand whether you will benefit from your rate choice or not. Short reference rates may be lower than the 12-month rate on the first interest review date, but as they change more frequently, the situation may quickly turn upside down.