Individuals who save money are experiencing the impact of the ECB's choice.
Creditors yearn for it, savers dread it: The overseers of the euro currency are steering towards their first interest rate decrease as a response to inflation. Financial experts and analysts are certain that the European Central Bank (ECB) will determine a reduction of the base interest rates by 0.25 percentage points today.
Why did the ECB increase interest rates so much?
In July 2022, the ECB concluded their long-standing policy of zero and negative interest rates to tackle the surging inflation that had reached unprecedented levels. Ten times consecutively, the central bank raised interest rates before taking a break. The interest rate at which banks can procure new funds from the central bank is currently at a level as high as in August 2001 at 4.5%. The deposit rate, which banks receive for funds left in the euro area, has hit its highest level since the inception of the currency union in 1999 at 4.0%.
Is there a turnaround now?
In the past few months, inflation has been tending to decline, granting space for interest rate reductions. Higher interest rates, on one hand, make loans more expensive, which can dampen demand and combat high inflation rates. On the other hand, costly financing is a burden for companies and private investors.
With the slumping economy and declining inflation rates, calls for lower interest rates have increased in recent months. The euro currency guardians have been preparing the markets for a downward step in June for some time now. "There is a lot in favor of a 25 basis point reduction," said ECB Vice President Luis de Guindos recently in an interview.
What does an interest rate reduction mean for savers and savers?
"If a rate decision is widely anticipated, prices will have already adjusted in advance," said ECB board member Isabel Schnabel recently to "ARD Plusminus" and tagesschau.de.
Anyone looking to invest money for an extended period of time now gets lower interest rates than a few months ago at many banks. According to the comparison platform Verivox, the average interest rates for one-year savings accounts were still 3.34% in December. Today, they stand at 2.98%, calculated Verivox. Verivox examined the terms of about 800 banks and savings banks for a deposit of 10,000 euros (as of June 1, 2024).
The average interest rates for easily accessible savings accounts also took a nosedive for the second month in a row in May to 1.72%. "Savings account interest rates have peaked," says Oliver Maier, managing director of the Verivox Financial Comparison GmbH. In the event of an ECB interest rate cut, savers and borrowers should expect "that the savings account interest rates will drop even more significantly than before."
Do borrowers benefit?
The mortgage rates tied to Bundesbank yields have already dropped: For ten-year loans, the interest rates were last at 3.66% per annum (as of 3.6.2024), but by the end of October they were more than 4%. This equates to cheaper real estate financing. "Anyone obtaining a mortgage today is already paying less interest than a few months ago. Financial analysts expect interest rates to be lowered in June," explained Schnabel.
What course will the ECB take in the coming months?
There are indications that the central bank will not follow up with additional rate cuts after the anticipated initial decrease. Bundesbank President Joachim Nagel, who is one of the decision-makers on monetary policy for the euro area in the ECB council, stresses that one cannot derive an "automatic pilot" from a first interest rate cut, implying that subsequent rate cuts are not guaranteed. Exercise caution, Nagel advised. It is crucial to monitor price developments from meeting to meeting, Nagel said.
ECB Chief Economist Philip R. Lane voiced in an interview with the British financial newspaper "Financial Times" that the ECB's monetary policy must remain "restrictive" throughout the year. Restrictive monetary policy signifies that the key interest rate is at a "neutral" level, so the economy neither slows nor accelerates. In the coming year, it may look different, Lane opined, if the inflation clearly settles within the target range of the ECB. The ECB aims for an inflation of two percent in the euro area in the medium term.
