Inflation is weakening. Concerns about the economy are growing. For the first time since July 2022, the European Central Bank will no longer increase interest rates in the euro area.
In view of the lower inflation rates, the euro currency watchdogs have not increased interest rates any further after ten interest rate increases in a row. The Council of the European Central Bank left the key interest rate at 4.5 percent, as the central bank announced after an external council meeting in Athens.
The ECB will continue to make decisions based on the data available, said President Christine Lagarde when asked about how to proceed. However, a discussion about interest rate cuts is “completely premature”. Recently, concerns about the economy had grown.
Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. More expensive loans are also a burden for the economy because loan-financed investments become more expensive. According to the central bank’s most recent decision, the deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the monetary union was founded in 1999.
According to Commerzbank chief economist Jörg Krämer, the ECB will probably not increase interest rates any further in the coming months. Thomas Gitzel, chief economist at VP Bank, also does not expect an increase this year. “Inflation rates will continue to fall in the coming months.” In addition, economic development remains difficult.
“Interest rate increases act like a long-term drug with significant time delays,” explained Friedrich Heinemann, economist at the ZEW economic research institute.
Medium-term inflation rate of 2.0 percent targeted
The ECB is aiming for stable prices in the medium term with an inflation rate of 2.0 percent. “Based on its current assessment, the Governing Council is of the opinion that the key ECB interest rates are at a level which, if maintained for long enough, will make a significant contribution to this objective,” the ECB said.
In September, inflation in the common currency area weakened significantly: the annual inflation rate fell from 5.2 percent in August to 4.3 percent. Last year, inflation was at times in double digits as a result of Russia’s war of aggression against Ukraine.
Since July 2022, the ECB has been countering this development with an unprecedented series of interest rate increases. Heiner Herkenhoff, general manager of the BdB banking association, warned that the ECB should keep the door open for interest rate increases.
Savers benefit from increased interest rates and reduced inflation
After a long dry spell, German savers are benefiting from increased interest rates and the recent fall in inflation. The first top providers pay interest on fixed-term deposits with a term of one year, which at 4.75 percent is above the inflation rate of 4.5 percent in September, according to an analysis by the comparison portal Verivox.
However, on average, the real interest rate – i.e. the interest after deducting inflation – for fixed-term deposits is still at minus 1.18 percent (reference date: October 20th). The loss of value due to inflation is therefore greater than the capital gain due to interest. According to Verivox, the era of rising interest rates could soon be coming to an end: “There are currently many indications that fixed deposit interest rates have soon reached their peak.”
Economy remains weak
Concerns about the economy had recently increased. “The economy in the euro area remains weak,” said Lagarde. The ECB recently expected an increase in gross domestic product of 0.7 percent this year. In July, an increase of 0.9 percent was predicted. According to estimates by the federal government and many economists, Europe’s largest economy, Germany, will even shrink slightly this year.
Source: Stern
