Euribor – key reference rate for the European financial market

Euribor, short for Euro Interbank Offered Rate, is the basic reference interest rate in the euro area. It affects not only interest rates in the interbank market, but also mortgages, loans and investment products of millions of households and companies. What is the history of this rate, how is it calculated, and what impact does it have on financial markets and property prices? Explore the importance of Euribor in the modern economy.

What is Euribor

The Euribor (Euro Interbank Offered Rate) is an interest rate that shows the price at which banks in the euro area are willing to lend money to each other for a certain period of time. Think of it as a reference point or “price list” in the money market. Banks also borrow money, either to cover short-term needs or to invest. For example, if they need €1 million for a few months, Euribor tells them what interest they will pay for it. This rate is calculated every working day and covers different time periods, from one week to one year.

Euribor affects ordinary people mainly through loans and mortgages. If you have an adjustable rate mortgage, your interest is often linked to Euribor. If Euribor goes up, your repayments will go up, and vice versa. It also affects interest on savings, loans to businesses and the overall cost of finance in the economy. So it is the indicator behind many financial products and indirectly affects the cost of living for millions of people.

What is it for

Euribor serves as an important tool for the functioning of the financial system. Its main purposes are:

• Interbank lending: banks lend money to each other when they need short-term funding. Euribor gives them a benchmark of what interest they should pay on these loans. It is similar to how shops set prices according to the market, Euribor is such a “market price” for money between banks.
• Basis for interest rates on financial products: many financial products such as mortgages, business loans and savings accounts are directly linked to Euribor. Banks use it to calculate the interest rates they offer to customers. For example, if you have an adjustable rate mortgage, your rate may be defined as “Euribor + 2%”.
• Stability and transparency: the Euribor provides a single reference rate for the whole euro area. This makes it easy for banks and businesses to compare the cost of funding in different countries. It also contributes to stability by creating a predictable framework for interest rates.
• It reflects the state of the economy: when the Euribor changes, it signals how the economy is doing. If it is low, it means central banks are keeping interest rates low to support economic growth. If it is high, it may mean the economy is overheating or there are risk concerns in the market.
• Helping investors and businesses make decisions: investors and businesses keep an eye on Euribor so they know what they can expect to pay when borrowing. It is an important indicator for planning budgets, investments or expansion.

In simple terms, Euribor is the fundamental “barometer” of the price of money in the euro area and affects the entire financial ecosystem – from banks to companies to ordinary people with mortgages.

How is the Euribor rate calculated?

The Euribor is determined each business day according to the following procedure (in simple terms):

1. Data collection: selected large banks in the euro area report at what interest rate they would be willing to borrow money from other banks for different periods (e.g. 1 week, 1 month, 3 months).
2. Exclusion of outliers: the highest and lowest values are removed from the data to eliminate outliers and biased fluctuations.
3. Calculation of the average: the remaining values are averaged and this average is the Euribor rate for the time period.
4. Publication: the final rate is published every working day at 11:00 CET (Central European Time, UTC +1)

The Euribor thus reflects what the current conditions are in the interbank market and at the same time influences a wide range of financial products.

History of the Euribor rate

The Euribor (Euro Interbank Offered Rate) was created in connection with the introduction of the single European currency, the euro, and came into use on 1 January 1999. It was designed as a single benchmark for interest rates in the euro area.

• Before Euribor: before 1999, each country in Europe had its own reference rates, such as FIBOR (Germany), PIBOR (France) or LIBOR (London for the pound). With the advent of the euro, there was a need for a single instrument that better reflected market conditions across the euro area.
• Introduction of Euribor (1999): the Euribor was officially launched with the introduction of the euro. It served to standardise interest rates between banks operating in euro area countries. In the beginning, the calculation of Euribor was based on data from more than 50 banks that were considered the largest and most trustworthy within Europe.
• Financial crisis (2008-2009): during the financial crisis, the Euribor experienced significant fluctuations. Banks trusted each other less, causing interest rates to rise. At that time, it became clear how much the Euribor was affecting the economy and ordinary households. Criticism focused on transparency and manipulation of the rate, with some banks being accused of unethical interest reporting behaviour.
• Reforms and confidence-building (post-2012): in response to scandals around rate manipulation, strict rules were introduced for the calculation of Euribor. Transition to a new calculation model based more on real transactions than on banks’ estimates. The system has been adapted to comply with EU rules on financial benchmarks and to minimise the scope for manipulation.
• Today’s role of Euribor: Euribor remains one of the most important indicators in the euro area. It influences not only interbank funding, but also mortgages, loans and investment instruments. Although alternative rates such as the ESTR (Euro Short-Term Rate) are being discussed, Euribor still retains its dominant position.

Explanation of Euribor rates

The Euribor (Euro Interbank Offered Rate) is a benchmark interest rate that shows the price at which banks in the euro area are willing to lend money to each other for different periods of time. These rates reflect confidence among banks and overall conditions in the financial markets.

Euribor includes a number of rates that vary according to the length of time for which the money is borrowed. These rates include:

• 1-week Euribor: money is lent for one week.
• 1-month Euribor: money is lent for one month.
• 3-month Euribor: one of the most widely used indicators, mainly used for mortgages and loans.
• 6-month Euribor: often used for longer-term loans.
• 12-month Euribor: used for longer-term financing.

Each of these rates is calculated daily and reflects current market conditions.

What influences the level of Euribor rates?

• Economic situation: in times of economic growth, the Euribor may rise as banks anticipate higher interest rates from the European Central Bank (ECB).
• ECB monetary policy: when the ECB raises its base interest rates, the Euribor is usually also raised.
• Confidence among banks: if banks believe there is risk in the market, Euribor rises as the price of lending risk increases.

Euribor and financial markets

The Euro Interbank Offered Rate (Euribor) plays a fundamental role in financial markets, influencing a wide range of economic activities, from interbank lending to loan pricing and investment decisions. It serves as a barometer of confidence in the markets and reflects the state of the European economy.

• Euribor as an indicator of confidence in financial markets:Euribor is an indicator of how much banks trust each other. If the Euribor rate is rising, it means that banks perceive more risk in lending money to other banks. Conversely, a low Euribor signals stable conditions and greater confidence among financial institutions.
• Linking Euribor to loans and mortgages: in financial markets, Euribor is the basis for setting interest rates on many loans and mortgages. Most variable mortgage rates are linked to Euribor (e.g. 3-month or 6-month). If the Euribor rises, mortgage payments increase. Firms often borrow at Euribor-linked rates, which affects their financing costs.
• Euribor and BondsA: Euribor affects the prices and yields of both short-term and long-term bonds. Bond issuers often set coupons according to the level of Euribor. A rise in Euribor can cause prices of existing bonds to fall as investors demand higher yields.
• Derivatives and financial instruments: various derivatives are constructed based on Euribor, such as Forward Rate Agreements (FRAs) and interest rate swaps
• Link to ECB monetary policy: the Euribor responds directly to the European Central Bank’s (ECB) decisions on key interest rates. If the ECB raises interest rates, the Euribor will usually increase, making it more expensive to borrow money. Conversely, a cut in ECB rates leads to cheaper funding and a lower Euribor.
• Euribor during the crises: the 2008 financial crisis, the Euribor rate rose sharply as banks distrusted each other and expected a high risk of default. COVID-19 pandemic, Euribor fell to historically low levels as a result of ECB stimulus and efforts to support the economy with cheap funding.

Example: impact on the Costa del Sol real estate market

The fall in the Euribor rate has had a significant impact on the Costa del Sol property market. Lower interest rates reduce the cost of mortgages, which increases the availability of credit for buyers. This trend leads to an increase in demand for property in the region, which in turn can push up property prices.

The increased interest in Costa del Sol real estate is also supported by international investors looking for attractive investment opportunities thanks to favourable credit conditions. In addition, the fall in the Euribor may stimulate the construction of new projects, as developers can obtain financing on more favourable terms.

Overall, the fall in the Euribor rate is contributing to the recovery of the Costa del Sol property market, increasing housing affordability and supporting economic growth in the region.

The role of the Euribor rate in mortgage interest rates

Euribor is the benchmark interest rate used by banks to calculate interest on variable rate mortgages. The bank adds its margin (e.g. 1%) to the current Euribor to arrive at the mortgage interest rate. If the Euribor rises, the mortgage repayments increase and, conversely, if the Euribor falls, the repayments fall. It thus directly affects the cost of mortgages and is an important indicator for both households and banks.

Impact on property prices

Euribor has a significant impact on house prices as it affects the cost of mortgages, which are a key source of funding for home purchases.

• Lower Euribor: at low Euribor rates, mortgage interest rates are lower, which reduces monthly repayments. This motivates more people to buy property and increases demand. Higher demand often pushes up property prices.
• Higher Euribor: if the Euribor rises, mortgage interest rates increase, which means higher repayments and less credit availability. This can reduce demand for property and cause prices to stagnate or fall.

Overall, changes in Euribor affect housing affordability, real estate market activity and price dynamics. It is therefore important for buyers and investors to monitor its development.

When a lot of people start buying property, this can lead to several indirect effects that will affect the Euribor:

1. Increased demand for credit: if more people take out mortgages, the overall demand for money in the market increases. Banks often lend to each other to meet this demand, which can increase upward pressure on interbank interest rates such as Euribor.
2. The European Central Bank’s (ECB) reaction: if rising demand for real estate causes prices to rise significantly (a real estate bubble) and increases inflation, the ECB may raise its key interest rates to cool the market. When the ECB raises rates, Euribor usually follows.
3. Long-term impact: if rising house prices lead to market overheating or loan default problems, confidence among banks may fall, which may also raise the Euribor.

The end of Euribor?

Euribor (Euro Interbank Offered Rate) is the key reference interest rate in the euro area, used to set interest rates for various financial products, including mortgages and loans. Despite discussions on reforms and the introduction of alternative reference rates such as the €STR (Euro Short-Term Rate), the Euribor remains in force and there are no plans to discontinue it. Reforms aim at increasing the transparency and reliability of the Euribor calculation to better reflect real market conditions.

Conclusion

Euribor is an indispensable indicator of the stability and functioning of the European financial market. Its influence on mortgages, loans and house prices makes it a key factor affecting not only banks but also ordinary consumers. Although alternative reference rates such as the €STR are being discussed, Euribor continues to play an important role in determining interest rates in the euro area. For home buyers, investors and all those affected by interest rates, it is important to keep an eye on the development of Euribor and its impact on the economy. Whether rates are rising or falling, Euribor provides insight into the health of the market and financial opportunities across Europe. As it continues to reform and adapt to modern standards, Euribor remains a relevant and credible instrument in the global financial market.