Will interest rates rise further? The ECB searches for an answer

Perhaps you recently received an email from your bank announcing higher interest on your savings account. That is welcome news. It is less welcome if you are taking out a mortgage or your fixed-rate period is ending.

Mortgage rates are rising. A home loan fixed for 10 years now carries an average rate of 4.10%, compared with 3.8% a year ago and more than 1% five years ago. Whether rates will climb further is a crucial question for anyone facing major financial decisions, but the answer is frustratingly unclear.

The European Central Bank must decide on interest rates this Thursday. Its short-term policy rate strongly influences savings rates, while mortgage rates depend more heavily on long-term rates in the capital markets. The ECB, led by Christine Lagarde, is widely expected to raise its main rate from 2.25% to 2.50% to counter inflation in the eurozone.

Inflation reached 3.3% year on year in August, up from 2.9% in July and well above the ECB’s 2% target. Raising interest rates is the classic central-bank response: borrowing becomes more expensive, economic growth slows, and price increases should eventually ease.

The harder question is what comes next. Inflation is far above target, which could argue for further increases toward the end of the year. But much of the current inflation is linked to the war involving Iran, especially Iran’s blockade of the Strait of Hormuz, which has pushed up global oil and gas prices. Energy prices in the eurozone were 14.3% higher in August than a year earlier. The ECB cannot reopen the waterway, but it hopes higher rates can prevent higher energy costs from spreading through the prices of goods and services. Concerns about inflation becoming entrenched are sharpened by memories of the 2021-2023 inflation wave.