The ECB wants to give a breather to mortgagors while awaiting the war in Iran

BrusselsThe unstable temporary truce between the United States and Iran has slowed the inflationary trend that the conflict initially caused. The rate of price increase in the eurozone is approaching the 2% target set by the European Central Bank (ECB) and fell to 2.8% in June, according to Eurostat data. For this reason, even though the resumption of attacks in the Middle East could return inflation to a growing path, the banking institution wants to wait for the evolution of the war before taking a misstep, and it is expected that this Thursday will keep rates at 2.25%.

In the last meeting of the Governing Council of the ECB, on June 11, it was agreed to increase the price of money by 0.25 percentage points after almost three years without raising it. However, the war initiated by the Donald Trump administration in the Middle East caused an increase in prices in the euro area countries and in May it reached 3.2% compared to the same month of the previous year. In June, the inflationary trend was already broken, also with regard to the underlying —the index that excludes products with more volatile prices, such as energy or food—, which went from 2.6% in May to 2.4% in June.

This reduction in the inflation rate is what leads the market, analysts, and all the governors of the Eurozone's central banks to unanimously advocate for maintaining interest rates at 2.25%. A decision that provides a respite for mortgage holders, as the price of money marked by the ECB directly impacts the Euribor, the main reference for variable interest rate mortgages.

However, geopolitics dictates, and the future of the conflict in the Middle East will be decisive for the European Central Bank's Governing Council's next decisions on interest rates. In fact, some eurozone central bank governors are opening the door to the possibility of raising the price of money again next September, and the very president of the monetary body, Christine Lagarde, does not rule out any option. Furthermore, at the next meeting of the ECB's Governing Council, on September 10, the institution will already have updated forecasts on inflation and economic growth, which are the two most decisive factors for Frankfurt when setting the price of money.

It should be remembered that raising the price of money is the main tool the ECB has to curb inflation, but it causes a slowdown in economic activity. An increase in interest rates makes the cost for banks to borrow money more expensive and, at the same time, banking entities pass this on in the form of more expensive loans they provide to their clients. And, naturally, if credit is more expensive, families and businesses find it more difficult to request loans from banks to consume or invest, which leads to a fall in demand and a reduction in the pace of the economy.

Slow growth

The war in the Middle East, however, not only negatively affects inflation, but also the economic activity of the countries in the single currency. At their last meeting, the ECB worsened the growth prospects for gross domestic product (GDP, the indicator that measures economic activity) for the eurozone and maintain it in an almost anemic situation: this year, at 0.8%; in 2027, at 1.2%, and in 2028, at 1.5%. Such low rates distance the governors of the central banks of the euro area countries from increasing the price of money and they prefer to wait to make a move until, at least, next September, especially waiting to see how the conflict in the Persian Gulf evolves.