Spain | Rising interest rates, less fragility

Interest rates have risen again, although, as usual, financial markets moved ahead of the European Central Bank’s (ECB) announcements. The 12-month Euribor rose from 2.2% in December to 3.2% in September, an increase of 100 basis points. The ECB, for its part, has raised rates by only 50 basis points so far, to 2.50%, but further tightening may be on the way. Markets are pricing in additional increases, with rates of 2.75% or even 3% seen as possible by year-end.

Long-term financing has also become more expensive. The yield on Spain’s 10-year government bond is now hovering around 4%, and its trajectory depends on more than just expectations about ECB policy. Across the Group of Seven (G7) major economies, 10-year government bond yields have risen by more than one percentage point to around 4.5%, their highest level in roughly two decades. Investors are demanding a higher “term premium”: compensation for lending over long periods amid elevated public debt, the energy shock, greater inflation uncertainty, heavy government bond issuance, and reduced bond purchases by central banks. Rising investment needs—in areas such as artificial intelligence, infrastructure, and defense—are also competing for available savings. And this matters well beyond government finances: sovereign bond yields serve as a benchmark for pricing mortgages, corporate loans, and long-term investment projects. Fiscal prudence, therefore, is also a way to keep private-sector borrowing costs in check.

The impact is beginning to show up in borrowing rates. The average interest rate on new mortgages rose from 2.64% in December to 3.10% in August, while rates on corporate loans increased from 3.66% to 4.10%. New lending activity has been virtually stagnant since the outbreak of the conflict in the Middle East, reflecting the extent to which uncertainty is weighing on both credit demand and supply. But it would be premature to interpret these early signs of moderation as a warning of widespread financial distress.

For indebted households and businesses, higher interest rates increase payments on variable-rate loans, reducing disposable income or squeezing profit margins. However, the Spanish economy now has significant buffers in place. In recent years, approximately 90% of new residential mortgages have been issued at fixed rates, while many older variable-rate mortgages have already had a substantial share of their principal paid down. Moreover, following years of deleveraging, household debt stands at 41.9% of GDP and corporate debt at 61.9%, their lowest levels in more than two decades. Nor are we facing a repeat of the 2022–2023 tightening cycle, when the ECB’s deposit facility rate climbed from -0.5% to 4%. The additional rate increases currently anticipated are far more modest, making a broad-based rise in loan defaults unlikely.

Precisely because the private sector is now better protected, attention should also turn to another source of vulnerability: sovereign debt. Indeed, the International Monetary Fund (IMF) recently warned that rising government bond yields are among the main risks to global financial stability. Higher borrowing costs not only force governments to devote a growing share of their budgets to debt servicing—leaving fewer resources available for public investment and social programs—but also threaten to depress the value of other assets and trigger corrections in financial markets. That is why the IMF has reiterated the urgency of fiscal discipline.

Monetary policy has a responsibility to fulfill as well. The ECB’s challenge is to prevent the energy shock from translating into persistent inflation. Safeguarding price stability means protecting purchasing power, especially for those with the least capacity to save. Ultimately, higher interest rates undoubtedly come at a cost. The difference is that Spain’s private sector is facing them with less debt and greater resilience. The challenge now is to prevent inflation and sovereign debt market tensions from eroding that advantage.

Press article. Published in Expansión on October 16, 2026.