The decline in inflation opens up room for maneuver for the euro’s monetary authorities: an interest rate cut is considered a given. Savers and borrowers will feel the impact even before the ECB’s decision.
Longed for by borrowers, feared by savers: After a series of interest rate increases in the fight against inflation, the euro currency guardians are moving toward a first interest rate cut. Economists and analysts firmly expect that the Governing Council of the European Central Bank (ECB) will decide today to reduce the key interest rates by 0.25 percentage points.
Why did the ECB raise interest rates so much?
In July 2022, the ECB ended its years-long policy of zero and negative interest rates in order to get inflation, which had at times reached record levels, under control. The central bank subsequently raised interest rates ten times in a row before taking a break. The interest rate at which banks can obtain fresh money from the central bank is currently 4.5 percent, the highest it was last seen in August 2001. The deposit rate that banks in the euro area receive for parked funds has reached 4.0 percent, the highest level since the monetary union was founded in 1999.
Is the trend reversal now coming?
Inflation has tended to fall in recent months, which creates scope for interest rate cuts. Higher interest rates mean that loans cost more, which can slow demand and counteract high inflation rates. At the same time, however, more expensive financing is a burden for companies and private investors.
In view of the weakening economy and falling inflation rates, calls for interest rates to be lowered again have recently increased. For months, the eurozone’s monetary authorities have been preparing the markets for a first interest rate cut in June. There is much to be said “for a reduction of 25 basis points,” ECB Vice President Luis de Guindos said in a recent interview.
What does a reduction in interest rates mean for savers?
“If an interest rate decision is widely expected, market prices adjust in advance. This means that if the interest rate decision is made in line with general expectations, then nothing should actually change because that is already priced in,” ECB Executive Board member Isabel Schnabel recently told ARD Plusminus and tagesschau.de.
Anyone who wants to invest money for a longer period of time now will no longer receive as high interest rates from many financial institutions as they did a few months ago. While fixed-term deposits available nationwide with a term of one year still brought an average interest of 3.34 percent in December, the current figure is 2.98 percent, as calculated by the comparison portal Verivox. Verivox has evaluated the conditions of around 800 banks and savings banks for an investment amount of 10,000 euros (as of June 1, 2024).
According to the Verivox analysis, overnight interest rates are also continuing to fall: In May, the average interest rates for overnight interest rates available nationwide fell for the second month in a row to 1.72 percent. “Overnight interest rates have passed their peak,” says Oliver Maier, Managing Director of Verivox Finanzvergleich GmbH. In the event of an ECB interest rate cut, savers would have to prepare themselves for “the fact that overnight interest rates will also fall even more significantly than before.”
Do borrowers benefit?
Construction interest rates, which are based on the interest rate on federal bonds, have already fallen: According to FMH financial advice, ten-year loans were most recently charged at 3.66 percent per year (as of June 3, 2024), while at the end of October it was still more than four percent. This makes real estate financing cheaper. “Anyone who takes out a real estate loan today is already paying less interest than they did a few months ago. Market players have long expected interest rates to be reduced in June,” explained Schnabel.
What course will the ECB take?
There are many indications that the central bank will not follow up with any further interest rate cuts after the expected first. Bundesbank President Joachim Nagel, who has a say in monetary policy for the eurozone in the ECB Council, has stressed that a first interest rate cut cannot be interpreted as a “kind of autopilot” that would immediately lead to the next interest rate cut. Nothing should be rushed. It is important to observe price developments from meeting to meeting, said Nagel.
In an interview with the British business newspaper “Financial Times”, ECB chief economist Philip R. Lane expressed the view that the ECB’s monetary policy must remain “restrictive throughout the year” despite foreseeable easing. A monetary policy is considered restrictive if the key interest rate is at a “neutral” level, so that the economy is neither slowed down nor stimulated. Things will probably look a little different next year if inflation visibly falls into the ECB’s target range, Lane said. The ECB is aiming for inflation of two percent in the eurozone in the medium term.
Source: Stern
