Have you heard of Euribor? If not, this interest rate may affect you more than you know—especially your savings accounts and mortgage rates. Since it’s a crucial indicator of how the economy will unfold in the future, understanding what Euribor is and how it affects you can make you more financially savvy over the long term.
Euribor is essentially the rate at which major European banks are willing to lend funds to one another on an unsecured basis. It is calculated daily based on the rates provided by a panel of European banks. These banks submit their rates by answering the question: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am Central European Time?"
The calculation of Euribor is managed by the European Money Markets Institute (EMMI). Each day, a panel of banks, which includes some of the largest and most stable financial institutions in Europe, submits their lending rates. From these submissions, the highest and lowest 15% of the rates are excluded to remove outliers, and the average of the remaining rates is calculated to determine the Euribor for that day. The rates are published daily by the EMMI, shortly after the calculation process is completed, and they are made available for various maturities, providing a comprehensive overview of the cost of borrowing in the interbank market across different time frames.
Euribor serves as a reference rate for a multitude of financial products and contracts, including:
Euribor rates reflect the supply and demand for short-term funds in the interbank market and, consequently, the overall liquidity and confidence within the banking system. A rising Euribor typically indicates that banks perceive greater risks in lending to each other, often due to economic uncertainty or financial instability. Conversely, a falling Euribor suggests more confidence and greater liquidity.
Central banks, particularly the European Central Bank (ECB), monitor Euribor closely as part of their broader economic assessments. Changes in Euribor can influence monetary policy decisions, such as adjustments to the ECB's key interest rates.
The Euribor rate most familiar to the general public is probably the six-month Euribor rate, which is normally used as a reference for calculating interest for variable-rate mortgages. Euribor plus a spread is used as the basis for determining the rate for the latter. For example: 6-month Euribor + 1.50%. If the 6-month Euribor rate on the day of the survey is 0.50%, the mortgage installment is set at 2.00% (0.50% + 1.50%).
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