European Central Bank raises Eurozone interest rates to 4.25%

In keeping with market expectations, the European Central Bank (ECB) raised Eurozone base rates last Thursday from 4% to 4.25%, the first rise in a year.

With Eurozone inflation rising in recent months, Jean Claude Trichet, President of the ECB, had made it fairly clear that the bank was going to raise interest rates in July. Some analysts were expecting more than a 25 point rise, and were surprised when Trichet implied that no further rises are in the pipeline.

Euribor, the interests rate most commonly used to calculate mortgage repayments in Spain, has risen to over 5.4% as a result of increasing base rates, putting further financial pressure on borrowers in Spain. But with Spanish inflation at 5.2% in June, real interest rates in Spain are still low by historical standards.

Despite low real interest rates in Spain, the latest increases in both ECB base rates and Euribor do mean higher financing costs for mortgage borrowers. The Spanish property portal Idealista points out that typical mortgage costs for a recently acquired property are now around 8,500 Euros a year, on top of which all other ownership costs such as maintenance and taxes have to be paid. For owners trying to sell, mortgage costs work out at just under 5% of the typical asking price, which is a reason for dropping the asking price by at least this amount to try and encourage a sale.

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