Rate hikes cast a long shadow over Europe
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
When inflation began to take off during the latter months of 2021, the Swedish central bank had the tools to react quickly.
Roughly four-in-ten households were sitting on floating-rate mortgages. Those that do fix in Sweden tend to do so for short periods—a summer 2024 study by S&P Global found that 80% of loans were either floating or on a fixed rate set to expire by the end of the year. As a result, it takes just twelve months for a rate hike to impact inflation: Riksbank research suggests that a one percentage point increase in the policy rate can cut inflation by 2 to 4 percentage points after about a year.
As the Riksbank began hiking, Sweden's economic contraction was among the swiftest in Europe. By the end of 2023, house prices had fallen about 15% from their 2022 peak.
An upward trajectory
It feels odd to celebrate the Riksbank's efficiency in crushing consumer spending power and destroying value, but it comes with perks. Sluggish transmission makes a central banker's job harder, particularly when economic volatility is high. In countries with many borrowers who fix for long periods, policymakers can be waiting nearly a decade for households to really feel the pinch via their mortgage.
European Central Bank research published this week illustrated the point. The ECB is now well into its cutting cycle, yet mortgage rates are still on an upward trajectory. In fact, borrowers rolling off long-term fixed rates will act as a drag on consumption until at least 2030. In France, for example, nearly 40% of mortgages are fixed for more than a decade.
The UK sits somewhere in the middle. Roughly 85% of mortgage lending tends to be on fixed rates, but loans are on short durations relative to countries like France and Germany. Roughly 1.5 million UK fixed rate mortgages will expire during 2025, many of which were agreed during the latter months of ultra-low rates in 2020. With fewer than 1% fixing beyond five years, the BoE will now have a clearer picture of household spending pressures.
Coherent policy
The ECB research feels so much more relevant in a week in which we've had multiple massive shifts in global trade policy. I think I count two, but there could be more: Trump's tariffs were legal at the beginning of the week, then a federal court ruled they were unlawful and sought to put them on hold, after which the US Department of Commerce appealed, leaving the entire policy in legal limbo.
Economists agree that US policy presents by far the biggest risk to the Euro economy (see Bloomberg chart), yet it's surely impossible to implement coherent economic policy in these conditions. US policymakers would agree - minutes from the Federal Reserve's May meeting suggests officials are minded to hold off on any interest rate changes until the impacts of US trade policy becomes clearer. Yet the ECB might not have that luxury in the face of a rising currency, cheaper oil, slowing growth and the continued transmission of former rate hikes.
This dance of shifting trade dynamics and global monetary pivots will impair the decision-making ability of anybody running a business that is impacted by the cost of debt - which is basically every business. When I read views on the UK outlook, like the IMF’s this week, I inevitably wonder what global trade policy looked like at the time it was written. The dates are often missing—and even if they weren’t, I wouldn’t have the faintest idea what global trade policy looked like on those dates anyway.
A repricing
Still, the IMF forecasts that growth will hit 1.2% this year, marginally higher than the 1.1% it predicted in April, before growth picks up to 1.4% in 2026. That's despite headwinds from US tariffs that will knock 0.3% off annual output.
Luc Eyraud, the IMF's mission chief to the United Kingdom, expects the BoE to cut interest rates by a quarter of a percentage point once a quarter until they reach a level of around 3%, down from 4.25% currently. That's quite dovish compared to the current consensus (though it does match consensus from four weeks ago - I don't know what the IMF's lead times are).
Analysts currently expect the BoE to execute just two cuts this year, and UK mortgage lenders are currently repricing product lines to account for that outlook. HSBC moved its leading fixed rate to 3.99% yesterday, up from 3.83%, which at the time was the cheapest on the high street.
In other news...
Read Oliver Knight on the government's (mistaken) assumption that residential developers are sitting on land unnecessarily.
Elsewhere - UK business confidence jumps in May (Times).