Inflation is slowly falling, the economy in the eurozone is weakening, but the central bank is taking its time: it is keeping key interest rates constant. But that could change in the autumn.
The European Central Bank is leaving interest rates in the eurozone unchanged despite the recent drop in inflation. The monetary authorities around ECB President Christine Lagarde are taking their time with the interest rate turnaround that began in June. In Frankfurt, they decided to leave the key interest rate at which banks can obtain fresh money from the central bank at 4.25 percent. The deposit interest rate that banks receive when they park excess money at the central bank remains at 3.75 percent.
This means that the ECB is refraining from further easing its monetary policy. However, many economists expect the central bank to cut interest rates at its next meeting in mid-September.
All eyes on September
The ECB left all doors open for the decision after the summer break and avoided giving any clear indications. Future interest rate decisions will continue to depend on economic data, Lagarde confirmed. Decisions will be made from meeting to meeting.
Lagarde pointed to the still high price pressure: overall inflation in the eurozone is likely to remain above the target until well into next year, she said. On the other hand, the trend towards high wage growth, which is causing concern among monetary authorities, is likely to weaken over the course of the year and there are economic risks: the eurozone economy “probably grew more slowly” in the second quarter than in the first.
ECB remains cautious
In order to get a grip on inflation, which had risen to record levels following the Russian attack on Ukraine, the ECB had raised interest rates ten times in a row since July 2022 before taking a break. In June, the ECB then cut interest rates by 0.25 percentage points for the first time since the wave of inflation.
The ECB has to manage a balancing act with its monetary policy. High interest rates make loans expensive. This can slow economic demand and counteract high inflation rates. At the same time, more expensive loans are a burden on the economy and private individuals who borrow money – such as home builders. If the ECB lowers interest rates too quickly, it runs the risk of inflation rising again.
“The European monetary authorities’ battle against excessively high inflation rates has not yet been won,” warns Heiner Herkenhoff, CEO of the Association of Banks. He calls for a sense of proportion in the interest rate decision on September 12. “The ECB should only lower interest rates if it can be sure that inflation in the eurozone is reliably heading towards the 2 percent mark.”
Inflation is falling – but slowly
Inflation in the currency area has recently weakened. The rate fell to 2.5 percent in June, down from 2.6 percent in May. Inflation is thus approaching the ECB’s target of an annual rate of two percent in the currency area in the medium term and sees this as maintaining price stability.
But the decline in inflation in the eurozone is slow. Economists are also concerned that the inflation rate excluding the volatile prices of energy and food, the “core inflation”, stagnated at 2.9 percent in June.
Criticism of easing restrictions
Some economists are therefore criticizing the ECB’s interest rate turnaround. The ECB Council is likely to lower key interest rates at its next meeting in September, “provided the inflation data allow it,” says Commerzbank chief economist Jörg Krämer. Further steps should follow in December and March next year. He complained: “However, this interest rate turnaround is premature because the inflation problem has not yet been solved.”
Ulrich Kater, chief economist at DekaBank, also believes that things are currently looking good for the next interest rate cut in September. A very plausible assumption for anyone who wants to save or borrow money is “that both short-term and long-term interest rates will continue to fall in the coming quarters.”
Savings interest rates have already fallen
Savers are already feeling the impact of the ECB’s latest interest rate cut in June at their banks. According to an analysis by the comparison portal Verivox, national banks paid an average of 1.69 percent for overnight money as of July 15. At the beginning of June, it was still 1.72 percent. Savings banks (0.62 percent) and regional cooperative banks (0.64 percent) paid significantly less on average.
“Many banks and savings banks quickly passed on the European Central Bank’s latest interest rate cut to savers,” says Verivox. Interest rates on fixed-term deposits over two years also fell – from an average of 2.82 percent at the beginning of June to 2.79 percent most recently.
No relief for home builders
Things are looking less positive for debtors. Construction financing, for example, is somewhat cheaper than last autumn, but the conditions have been at a higher level for several months. According to FMH-Finanzberatung, interest rates for loans with a 10-year fixed interest rate were recently around 3.7 percent and 3.85 percent for a 15-year fixed interest rate. Loan brokers expect there to be little movement in construction interest rates, at least in the coming weeks.
Source: Stern
