With Calm Returning to Capital Markets, Uncertainty Remains

Interest Hike a Sensible Move

The latest interest rate hike by the European Central Bank (ECB) did make sense at the time the decision was made. Inflation risks had increased, the war in Iran had put pressure on energy prices, and the ECB sought to avoid the impression of being late to respond again. However, the most recent inflation data suggest that different decisions may be called for in future.

Germany’s inflation rate averaged around 2.3 percent in June, thereby coming within range of the ECB target. While the inflation in the Eurozone as a whole was significantly higher at 2.8 percent, it was lower than expected. From our point of view, the Eurozone data make it more reasonable to adopt a wait-and-see attitude than to keep tightening the key lending rates.

But this does expressly not imply that we consider the most recent interest hike misguided. The inflation threat has by no means been checked. Against the background of the protracted Iran conflict and the potential price growth across sectors it implies, it was of the utmost importance for the markets, not least the interest rate markets, to get a clear signal from the ECB.

Similarly, the Federal Reserve’s decision to abstain from interest hikes at this time is not indicative of a negligent monetary policy. After all, the current US administration exerted considerable pressure on the bank to cut rates. So, the Fed’s decision to leave the key lending rates unchanged and to reaffirm its inflation target is a sign of the bank’s independence and stability focus rather than of any reticence motivated by weakness.

Capital Market: Stabilisation but No All-Clear Signal

With a ceasefire in place in Iran, long-term lending rates gradually came down again. Oil prices also stabilised in the wake of the ceasefire. But it would be premature to sound the all-clear signal. After all, the conflict remains inconclusive, and has only been halted for the time being. Energy prices are not the only way for geopolitical threats to impact inflation and interest rates along with it. They influence supply chains, defence budgets, investment decisions and risk premiums. Especially for long-term debts it is of key importance whether capital markets are permanently pricing in a heightened degree of uncertainty. Equally important is the—still excellent—credit worthiness of the Federal Republic of Germany because the rate of return on German government bonds acts as key benchmark for the conditions of long-term bank loans.

For the real estate industry, the key interest decisions by central banks are less relevant than the question whether the long end of the interest curve will stabilise. The trend in June displayed this sort of stabilisation, but did so on a somewhat lower level. So, we are not expecting to see a serious interest rate drop.

Interest Rate Development

Short-term money market interest rates kept going up in early June whereas long-term rates subsided again over the course of the month. The 3-month Euribor went up from 2.25 percent at the start of the month to levels that exceeded 2.40 percent at times, ending the month at around 2.32 percent. The 6-month Euribor ranged mainly between 2.52 percent and 2.64 percent and stood at around 2.57 percent by the end of the month.

The long side, by contrast, presented a different picture. While the 10-year swap rate approximated 3.02 percent at the beginning of the month, it climbed to over 3.11 percent as the month progressed before returning to roughly 2.90 percent by its end. This means that long-term interest rates have somewhat eased following their ascent in previous months.

It is a trend that reflects the current situation. The short term rates mirror the tighter monetary policy pursued by the ECB. By contrast, the long end is showing a stronger response to the stabilisation of energy prices and to the expectation that the inflation surge may be more limited than initially feared. Although this is a good sign for real estate financing, it hardly marks a turning point.

Real Estate Financing: Deteriorated Sentiment, Market Continues to Function

The latest edition of BF.Quartalsbarometer, covering Q2 2026, shows that sentiment among real estate lenders has taken a nosedive. The mood swing is explained primarily by the continued war in Iran, by fresh inflation and interest worries, and by a persistently sluggish economy. At the same time, financiers have become more cautious, scrutinising projects more thoroughly and demanding more equity. Not least because the continuous turning of the regulatory screw requires ever higher equity stakes from banks as well, while the room for manoeuvre when assessing real estate financing risks keeps tightening. It is true that the coalition committee of the German Parliament recently reduced the equity requirements for banks that are underwriting home loans. But this applies only to certain German exemptions. The stepped-up equity requirements specified in European-level regulation remain in effect.

Outlook

The decline of long-term interest rates in the wake of the Iran ceasefire is principally a piece of good news. Not every fresh instance of uncertainty will prompt a permanently higher level of interest rates. However, we should acknowledge the fact that we have entered a phase of constant geopolitical uncertainty. The old geopolitical order will not be restored even after the wars in Ukraine and in Iran have ended. It is in this environment of sustained uncertainty that corporate decisions have to be made. Venturing mid- or long-term interest rate forecasts, which are difficult to make anyway, does not become easier in such an environment. Nevertheless, we consider it highly unlikely that we will see significantly lower long-term interest rates before the end of this year. Our recommendation for inventory financing arrangements is therefore to opt for fixed long-term interest rates, assuming the project at hand is viable. It also remains crucial in this context and time to approach finance partners as early as possible. Since banks are carefully reviewing every little detail now, preparing your documents diligently and exhaustively is more important than ever. If you wish to avoid risk mark-ups, your project should be perfectly transparent.