French interest rates still rising

Over the last month banks have seen increases of 0.40% in the OAT, one of the main indices in France, which has led to further increases in the cost of fixed rate and capped rate mortgages. The French OAT index, which is based on the total obligations of the French treasury for bond issues over different durations, forms the basis for much of the long term lending at either capped or fixed rates of interest. This rise has been fully passed on to borrowers by the majority of banks now with some going further and increasing rates over and above this rise. Many banks have also taken this opportunity to slightly increase margins and initial rates on variable products even though the 3 month Euribor has been stable for the last month at just over 1%.

It still remains unclear as to the exact timing of further increases to the ECB base rate which continues to remain steady at 1%, though we may continue to see increases to fixed rates if the expectation of further inflation and rate rises from the ECB become apparent for the medium term. Should the spectre of a double dip recession raise its head again or if a continuous stream of unhelpful economic events casts doubts on the recovery, we may see long term interest rates begin to fall again. On the other hand if we continue to see a lack of liquidity in the market coupled with concerns over risk profiles and inflation we may find that rates will continue to rise.

In effect it is increasingly difficult to judge which direction interest rates will move in the short term unless you have a crystal ball as there are now so many factors at play. For this reason, we recommend that our clients still consider our capped and fixed rates. In spite of any recent rises, these product types offer long term peace of mind which has a premium all of its own.