About 80% of the cumulative increase in ECB interest rates in 2022 and 2023 (therefore from approximately 0% to a maximum of 4.5%) has been effectively reflected by the banks in the interest rates applied to Portuguese households and companies in housing credit contracts, where they enjoy Portugal has one of the highest “monetary transfer” ratios in a group of 26 countries, reveals a study by the International Monetary Fund (IMF) included in the “Global Economic Prospects” report, released this week.
The Portuguese case is more sensitive because, as the IMF has shown, a third of households have an active mortgage contract (still in repayment to the bank), making them highly vulnerable to rising interest rates due to the overwhelming spread of interest-linked contracts with variable rates.
The proportion of contracts linked to a fixed rate has risen slightly over the past 11 years, but it remains one of the lowest rates internationally (about 20% of total mortgages). The international average in the reference group analyzed by the IMF is almost three times higher: about 56% of contracts have a fixed interest rate.
This is one of the main reasons for the vulnerability of Portuguese households in the face of a very high interest rate environment, which, without absolute certainty, should only start to decline in June and in a very slight way, according to the ECB. There is talk of just a 0.25 percentage point cut in the interest rate, eventually (but less likely), followed by a new cut of the same size later this year, which would put the Frankfurt reference rate at 4%.
As mentioned earlier, the IMF has been calculating an index capable of measuring the ability of banks to reflect rising interest rates in housing loan prices throughout the current cycle of “restrictive” monetary policy, which cools very high inflation by imposing strong restrictions on household consumption and business investment. (local demand).
Thus, in the new forecast, the fund managed by Kristalina Georgieva has prepared a rating based on the ratio that measures this ability or effectiveness in transferring the additional costs of interest rates to households that have debts to the bank for reasons related to the purchase of housing.
The International Monetary Fund explains that this ratio is, essentially, the ratio of the accumulated increase in interest rates on existing mortgage loans compared to the accumulated increase in the base interest rate in the post-pandemic cycle, between 2021 and 2023.
As mentioned, in Portugal the ratio is 0.79 (i.e. 70% of the increases issued by the ECB were transferred to the interest rates that banks apply to customers).
In the Eurozone, there are some countries with higher ratios, see the case of Lithuania (91%) or Latvia (81%), but household vulnerability in these countries is much lower. The reason: The percentage of families with mortgages does not reach 10%, which is about a third compared to the Portuguese reality, according to the International Monetary Fund.
“In the larger post-pandemic cycle of restrictions in Europe, transmission has been heterogeneous depending on the types of interest rates we analyse,” he begins, referring to the IMF.
For example, “conversion appears to be highest for term deposits, followed by conversion for mortgage loans and loans to non-financial companies.”
But compared to previous cycles, “transfers in Europe have weakened somewhat, with the exception of term deposits and loans to non-financial companies.”
“The effects of the transition of mortgage rates on real activity depend on the characteristics of the mortgage market, such as the spread of mortgages, the variable rate, and the percentage of households with a mortgage. In some European countries, the transition to outstanding mortgages is high, but the percentage of households with Which has relatively low mortgages and this is the categorical example mentioned above, from Latvia and Lithuania.
However, “in other cases, there is strong transmission, coupled with a large stock of mortgage loans, which could mean significant changes in household debt servicing costs,” say IMF economists.
“The annual increase in mortgage debt servicing costs compared to mid-2022 varies widely across the euro area, from Portugal at 1.2% of GDP to Malta at almost zero.”
In other words, all things considered, it is, in fact, Portuguese households who foot the biggest bill (in comparative terms) due to banks' efficiency in passing on interest costs to customers (households, specifically).
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