September has been thick with challenges for investors with renewed interest in the rate cut by the European Central Bank. In fact, the property market performed very well on the Spanish stock market in August. The main listed sector companies recorded significant increases with joint capitalisation standing at €15.346 bn, representing a 4.66 per cent uptick. Such uptick is particularly important if compared to the IBEX 35, which ended the month up 1.82 per cent. All this occurred in a context marked by expectations of a rate cut by the European Central Bank (ECB).
The ECB Cuts Interest Rates by 0.25 Points
On 12 September, the European Central Bank unanimously approved a new quarter-point cut in the interest rate applicable to the deposit facility, giving a welcome boost to the economy and setting the deposit facility rate at 3.5% in a controlled but still persistent inflation environment.
The spread between the interest rate on the main refinancing transactions and the deposit facility is now set at 15 basis points, as announced in the operational framework review back in March. As a result, the interest rate on the deposit facility will be reduced by up to 3.50%. Interest rates on the main refinancing transactions and the marginal lending facility will be reduced by up to 3.65% and 3.90% respectively.
What Impact Does This ECB Decision Have?
The recent interest rate cut by the ECB, with a decrease of a quarter of a percentage point, marks a trend that usually causes an upward movement in the stock market, with fixed income losing interest and investors assuming the risk of variable income.
With this measure, the ECB takes the lead over the US Federal Reserve, which has not yet made a move—although it is expected to do so shortly. According to Bloomberg analysts, rates in the Eurozone could near 3% by April 2025, which represents a considerable reduction compared to the 4.25% at which rates will be placed after the adjustment.
Main effects of the rate cut:
- Reduction in loan and credit rates: Commercial banks will adjust their rates for the benefit of borrowers.
- Relief on mortgage payments: Especially for those with variable rate mortgages, as Euribor is closely linked to ECB rates.
- Cheaper loans: For consumer purchases, loans will be more accessible even though they are not directly linked to Euribor.
- Greater consumption and investment: With saving being much less attractive and credit being cheaper, both investment and consumption will be encouraged.
- Durable goods spending: More affordable financing will boost property purchases, although this effect may be dampened by buoyant prices.
- Potential inflationary pressures: A rise in demand for goods and services could lead to a rebound in prices, thereby affecting consumers’ purchasing power—unless it leads to better wages.
- Lower return on savings: Savings accounts and fixed-term deposits will offer lower returns, which could push investors to look for options securing higher returns, even if it means taking more risks.
How Does It Impact on Property Investment?
The interest rate cut enhances property investment prospects by up to 20 per cent.
Improved funding terms encourage greater demand and, hence, greater pressure on prices, particularly in higher quality properties and markets with less supply.
As for housing, the adjustment of interest rates is good news both for those who have taken out an adjustable rate mortgage, the review of which is imminent, and for those who are seeking funding for the purchase of a home. This may help to prolong the upward cycle of the property market and will boost demand for residential units, which may contribute to an increase in prices and, therefore, to greater market tension in certain areas.
If this trend continues, we will see new investment vehicles and funds returning to our market with an appetite—not only in the hottest sectors, such as residential and tourism-linked assets, but also in the office and retail segments.
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