- The conflict in the Middle East is driving up oil prices and pushing up inflation.
- The European Central Bank will not raise rates yet, but markets expect tightening.
- Banks perceive more expensive market sources and may start raising mortgage prices.
The consequence of the conflict in the Middle East could also be an increase in the price of mortgages in Slovakia. The significant rise in oil prices will soon be reflected in inflation, and if this situation lasts longer, the European Central Bank (ECB) will also have to react by increasing its key rates.
According to analysts, this will not happen at its next meeting this week on Thursday (March 19), but financial markets expect interest rates to rise during the year. It is therefore very likely that mortgage interest rates are currently at their lowest in a long time and their rates will tend to move upwards, said economic analysts for TASR.
“It would be rather surprising if the ECB raised rates already at the next meeting in March. Although some experts say that this time the ECB should react more flexibly to the development of the situation, as was the case with the energy crisis in the fall of 2021 and the subsequent Russian invasion of Ukraine in February 2022, on the other hand, the European economy is under pressure and the increase in the cost of credit financing when the ECB’s base rates are raised could do more harm than good,” explained financial analyst OVB Allfinanz Slovakia Marián Búlik.
He pointed out that the rise in oil prices is temporary and everything will depend on the development of the conflict in the Middle East, which even the American administration will not want to prolong artificially. However, if it were to last longer and even for more weeks or months, the transportation of oil and other raw materials through the Strait of Hormuz would be close to zero, inflation in Europe will undoubtedly increase, according to the expert.
“In that case, the ECB would have no choice but to increase rates in an attempt to dampen the growth of inflation. Mortgage interest rates will no doubt react to this move. Even before the Iranian crisis, it was assumed that the decline in rates would slow down further and eventually stagnate. With increased ECB rates, the decline in rates will stop and may even rise again.” announced Búlik.
He calculated that over the past 1.5 years, average mortgage rates in Slovakia have fallen by approximately 1.2 percentage points (bp) to 3.35%, and the lowest rates offered by banks have reached 3%. “An increase in ECB base rates by 0.25 pp could push the average to 3.5% again within a few weeks or months. This would mean that banks would adjust especially the lowest rates on offer,” added the analyst.
The ECB will leave its base interest rate unchanged at 2% on Thursday, March 19, predicts Wealth Effect Management (WEF) chief economist Vladimír Vaňo. At the same time, however, he recalled that already during the first week of the attack on Iran, the financial markets began to count on a more than 50 percent probability of this year’s rate hike by the central bank.
“Although the ECB will probably start preparing the market for the possibility of monetary policy tightening, its decision-making will be made more difficult by the fact that the supply shock caused by the Iran war is already reflected in negative revisions of economic growth forecasts in the largest European economies.” warned the analyst.
He also pointed out that for interest rates on long-term loans, including mortgages, the development of market rates with longer maturities, including yields to maturity from government bonds, is even more important. At the same time, long-term interest rates have already responded by increasing to the increase in the price of energy commodities and to concerns about the possible acceleration of the price growth of agricultural crops and food.
“The conflict in the Middle East is already affecting the financial markets, which our banks are also aware of. Precisely because of the increase in the price of resources on the markets, they do not have to wait for an increase in the ECB rate, and they can start adjusting interest rates even earlier,” stressed Eva Šablová, director of loans at Fingo.sk.
However, according to her, how and when banks will react depends on their internal policy. It is therefore not possible at this moment to predict changes in mortgage interest rates in individual banks. “We are inclined to believe that Currently, we are most likely at the bottom of the interest rate, and the next interest rate adjustments in the banks will lead to mortgages becoming more expensive,” added the expert.
