Eurozone bank rates creeping up - ING

Teunis Brosens, Senior Economist at ING, explains that as Eurozone deposit rates approach zero and bank margins are getting squeezed, bank lending rates have been creeping up in 1Q.

Key Quotes

“Is the long slide down really over? In the first quarter of 2017, borrowing costs for households have crept up in many Eurozone countries. The movements are minimal: the ECB-calculated “composite cost of borrowing” for household mortgage loans ended 1Q17 at 1.85% for the Eurozone against 1.78% in December. And the past few years have seen temporary bank rate hikes before, as recent as Spring 2015, when QE was already in full swing.”

“But this time may be different, and rates may really be hitting bottom now. That is because bank lending margins are getting increasingly squeezed (shown in chart is the measure calculated by the ECB as margin over new deposits). The margin on new mortgage loans now stands at 144bp, compared to 169bp a year ago and around or above 200bp before QE started.”

“Businesses too borrowed at slightly more expensive rates in 1Q. The Eurozone composite cost of borrowing for businesses increased by 7bp, to 1.83% in March. This is marginally higher than the 1.81% recorded in December. The rise originated mostly from loans over €1m in size, while smaller loans (up to €250k) saw a further fall in rates.”

“The prospect for a further bank rate drop is limited, as bank lending margins are coming under increasing pressure. This in turn is the result of deposit rates in the Eurozone approaching the zero lower bound. The average Eurozone household deposit rate fell 1bp to 0.22% in March. Average rates are even at or below 0.05% in Spain and Belgium. Deposit rates for businesses average 0.06% in the Eurozone, are -0.00% in Germany and even -0.03% in the Netherlands.”