Rise in Long-Term Interest Rates Now a Reality – Markets Responding with Calm

The ECB’s decision on 30 April to leave its key lending rates in place was unsurprising. The central bank cited uncertainty and the need for more data as reasons for its decision. But it is quite obvious: Rather than sounding an all-clear signal, the bank’s reluctance points to a dilemma.

Economic growth remains weak whereas the inflation risks are exacerbated by the ongoing Iran war. As a result, two reciprocal forces are at play here. And that is precisely what keeps the ECB from making an unambiguous decision at this time.

But the situation is hardly acceptable for the market. The longer the conflict drags an, the more probable a monetary policy reaction becomes. Interest rate cuts that were deemed likely just months ago are now receding into the background. Instead, there is a growing chance that interest rates will maintain their high level for an extended period of time or rise even higher.

Capital Market: Interest Tightening Cycle Has Already Started

While the European Central Bank keeps sitting on the fence, the capital market has lost no time to respond. Long-term interest rates have been rising since the start of the conflict in the Middle East. This means that the decisive adjustment in real estate financing has already taken place. Even without a key rate hike, the terms of financing have visibly shifted. The rise in long-term interest rates has thus become a reality.

Worth noting here is less the level but the type of adjustment. The movement proceeded in an orderly manner and with no sign of overreaction. Neither the money markets nor the capital markets experienced sudden fluctuations. This suggests that the elevated risks are being rationally priced in, and that market mechanisms are fully functional.

Even if the ECB were to keep holding out, it would imply no relief. On the contrary: If the monetary policy falls short of addressing the expected inflation, the inflation expectations are precisely what will keep driving up long-term interest rates. To some extent, the market has arguably uncoupled itself from the monetary policy. What counts for investors is no longer what the ECB announces but the level where capital market rates actually stabilise.

Interest Rate Development

The trend in interest rates presents a more differentiated picture in April 2026 than it did the previous month. While March brought a visible upward trend that continued into the early days of April, it began to stabilise in some respects over the course of the month.

The 3-month Euribor moved within a bandwidth of around 2.07 percent to 2.24 percent and thus showed only moderate upward movement, all things considered. The 6-month Euribor was significantly higher as it moved mainly in a range between 2.38 percent and 2.52 percent.

On the long side, the 10-year swap rate started into the month at around 3.01 percent but fluctuated within a range of about 3.01 percent to 3.14 percent as the month progressed. Accordingly, the significantly increased interest level of March flatlined in April rather than continuing its upward surge.

It is a crucial development: The market, rather than overreacting, has stabilised on a higher level. A long-term comparison suggests that the level of interest rates actually remains in the mid-range. Capital markets appear to have largely factored in the increased inflation risks. This would confirm the picture that recent months presented. While shorter-tenor rates continue to be stabilised by the ECB, long-term rates reflect an already completed adjustment.

Bank Lending: Narrowing Corridor

The most recent ECB survey reveals that credit standards continue to tighten. Banks have responded to heightened risks, increased refinancing costs and growing uncertainty by introducing more restrictive lending criteria. Their response coincides with slow demand. Once again, housing construction has begun to slow down as companies are shelving or reviewing their investments.

This combination has caused the financing corridor to narrow, albeit without bringing the market to a standstill.

Construction and Real Estate Industries: Growing Pressure but No Wave

For the construction and real estate industry, the situation has visibly deteriorated. It is caught between increased lending rates, tighter borrowing criteria and slow demand, on the one hand, and development projects whose budgets are based on obsolete assumptions, on the other hand. While the insolvency risk did not surge in response, it has gone up steadily.

Particularly hard hit are developers with current construction costs and uncertain follow-up financing, and property asset holders burdened with tight debt servicing. Analogously, the construction industry remains under pressure. Low order books, rising costs, and project delays appear to have dovetailed, with a uniform impact.

Still, a widespread NPL wave is not to be expected. The market mechanism remains the same it has been over the last months: Restructuring efforts, renewals, selective sales and insolvencies are observable only among the weakest market operators.

Ramifications for Real Estate Finance

In real estate financing, the focus keeps shifting. The most pressing question is no longer whether lending rates are going up but at which level they will stabilise.

For the time being, the industry will have to cope with the current interest level and consider itself lucky. While it exceeds the levels of previous years, it is not exceptionally high by historic standards. Then again, there is nothing to suggest that the strain will ease any time soon.

Financing, where available, is subject to significantly tighter conditions. Low loan-to-value ratios, stable cash flows and conservative appraisals now set the standard. Banks remain cautious, whereas alternative financiers continue to strengthen their position.

Outlook

The coming months will be defined less by monetary policy decisions than by movements in the capital markets. The geopolitical situation will remain the key driver. Energy prices and the inflation level might stabilise once the situation de-escalates. In this case, capital markets would continue to calm down.

If, conversely, the conflict were to drag on, financing costs could be expected to keep rising or in any case to remain elevated. However, the market has demonstrated it knows how to cope even with this kind of environment. For the real estate industry, this means: Adapting to a higher interest rate level is no longer a transitional phase but is becoming the new normal.

The key question now is whether and when real estate prices in their various segments will adjust to the new level of interest.