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I still don’t get why the ECB hiked rates in April and July of 2011. I questioned this using bond market pricing back in August 2011. Now I question it once more using the ex post trajectory of mortgage rates.

Across the euro area, 43% of total home loans are made on a variable rate basis – this means that mortgage rates are highly elastic to ECB rate setting policy.

Average mortgage rates started rising well before the ECB actually hiked rates. The bottom in mortgage rates was seen in June 2010 and hit a local peak in August 2011 when rate cut expectations started to pass through. But the high correlation between ECB policy and average mortgage rates was to be expected and very harmful to those economies with a rising household desire to save.

click to enlarge images

It would be one thing if the variable mortgages were concentrated in the core countries; but they’re not. The Periphery economies drive up the average share of variable rate mortgages. In the most extreme case, Portugal, 99% of all home loans are made at a variable interest rate. It doesn’t take a PhD to figure out the speed at which tighter monetary policy will pass through to the real economy when 99% of all loans are made at a variable rate.

Like I said, I still don’t get why the ECB hiked rates.

Source data: ECB for current rate data, and an ECB structural issues report on EA housing for the variable rate shares.

Source: I Still Don't Get Why The ECB Hiked Rates