Little cheer in Federal Reserve rate cut for holders of Finnish home loans

Interest rates on housing loans could surpass December 2007 peak during the spring

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The hefty 0.75%-point cut made on Tuesday by the U.S. Federal Reserve is not likely to provide much solace to Europeans looking anxiously at their housing loans and mortgages, even if it did steady the ship a little and calm the market jitters seen on Wall Street and elsewhere after the weekend.
      In fact the opposite is true for borrowers, for the sharp drop in the federal funds rate to 2.25% is a signal of the continuing problems stateside, which will have a knock-on effect in Europe, too.
     
As a sign of what is probably in store, the most-common benchmark used in Finnish housing loans, the 3-month and 12-month euribor rates, continued their upward climb on Tuesday.
      Problems in the ailing US economy, which is standing on the brink of recession, had dramatically been exacerbated over the weekend with the news that one of the country’s largest investment banks, Bear Stearns, was forced into an abrupt sale to rivals JP Morgan Chase for a fraction of its earlier value, in order to avoid a total meltdown.
      Some analysts had anticipated an even bigger Fed rate cut, of as much as a whole percentage-point, but more encouraging news from bankers Goldman Sachs and Lehman Brothers, whose quarterly profit figures were not as painful as had been expected, may have swayed the policymakers.
     
In any event, the global credit crunch set in motion by America’s subprime mortgage crisis continues to send shockwaves and turbulence through world markets.
      It may seem that the events in the United States - where the Federal Reserve has slashed interest rates repeatedly from 5.25% last September in an attempt to keep the economy ticking over - are a long way from the lives of Finns looking at their housing loans.
      However, there are direct repercussions from the situation across the Atlantic.
      International financial markets are highly integrated and the lack of confidence existing among the banks is reflected in the European situation.
     
It is also pushing interest rates up here, notes the Aktia Bank chief economist Timo Tyrväinen.
      Only a month ago it appeared as though interest rates in Europe were turning downwards.
      The euribor rates peaked in December, when the most common rate used for housing loans, the 12-month euribor, climbed to 4.9%.
      Thereafter it slipped down to 4.3% in the space of a couple of months, but March has seen a steady rise once more, and on Tuesday the 12-month rate stood at 4.647%.
      Timo Lindholm, chief economist with Pohjola Bank, sees inflation worries as the primary reason for the sharp upturn in rates in past weeks. The European Central Bank has raised its forecasts for inflation and therefore postponed expectations and hopes of a quick cut in the ECB’s key lending rate.
      The prevailing market uncertainty and spiralling crude oil prices, pushing up inflation, have also done nothing to keep a lid on rates.
     
With many believing that uncertainty and turbulence is likely to continue, and with the prospect of inflation topping 3% in Europe, the banks’ economists do not anticpate any relief for Finnish borrowers in the near future.
      Spring could spring a nasty surprise, with financing costs rising more than expected, and it is possible that short-denominated loans could surpass the previous peak of 4.9%, according to the Tapiola Group's chief economist Jari Järvinen.
     
All three economists believe that the ECB will reduce rates in the eurozone in the course of the year.
      Expectations of a eurozone rate cut are also affected by the euro’s apparently irresistible rise against the dollar.
      The currency peaked earlier this week at USD 1.59 to the euro, meaning a dollar was worth just under 63 cents.


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