Central Bank - No hurry for rate hike - ECB leaves interest rates unchanged
The European Central Bank keeps interest rates unchanged in the Eurozone despite recently decreased inflation. At its June turnaround, currency traders around ECB President Christine Lagarde have some time. They decided in Frankfurt to leave the main interest rate, to which banks can borrow fresh money from the Central Bank, at 4.25%. The deposit rate, which commercial banks receive when they park excess money at the Central Bank, remains at 3.75%.
The ECB is forgoing an immediate easing of its monetary policy. However, many economists expect the Central Bank to lower interest rates at its next meeting in mid-September.
All eyes on September
The ECB left all doors open after the summer break and avoided clear indications. Future interest rate decisions will depend on economic data, confirmed Lagarde. Decisions will be made from meeting to meeting.
Lagarde referred to persistent high pressure: The overall inflation in the Eurozone should remain above the target value deep into the next year, she said. On the other hand, the trend towards high wage growth, which worries currency traders, should abate and alleviate economic risks: The economy of the Eurozone is likely to have grown more slowly in the second quarter than in the first.
The ECB remains cautious
To get a handle on the record-high inflation caused by the Russian attack on Ukraine, the ECB has raised interest rates ten times in a row since July 2022. In June, the ECB then lowered interest rates for the first time since the inflation wave by 0.25 percentage points.
The ECB must balance its monetary policy. High interest rates make credit more expensive. This can dampen economic demand and counteract high inflation rates. More expensive credit, however, is also a burden for the economy and individuals who borrow - for example, homebuilders. If the ECB lowers interest rates too quickly again, it risks attracting inflation back.
"The fight of European currency traders against high inflation rates is not yet won," warns Heiner Herkenhoff, CEO of the Banking Association. For the interest rate decision on September 12, he demands caution. "The ECB should only lower interest rates if it can be sure that inflation in the Eurozone reliably approaches the 2% mark."
Inflation declines - but slowly
Recently, inflation in the currency union has decreased. The rate fell to 2.5% in June from 2.6% in May. The inflation rate is thus approaching the ECB's medium-term goal of a yearly rate of two percent in the currency union and maintaining price stability.
However, the decline in inflation in the Eurozone is slow. Economists are concerned that the core inflation rate, which excludes volatile prices for energy and food, stagnated at 2.9% in June.
Criticism of easing
Some economists criticize the ECB's turnaround. The ECB Council should lower interest rates on the next meeting in September, "if inflation data is halfway decent," says Commerzbank Chief Economist Jörg Krämer. Further steps should follow in December and in March next year. He complained: "This turnaround is premature because the inflation problem is not yet solved."
Currently, it looks good for a next interest rate cut by the ECB in September, according to Ulrich Kater, Chief Economist of DekaBank. A very plausible assumption for those who save or borrow, is that "both short-term and long-term interest rates will continue to decrease in the coming quarters."
Interest rates already decreased
The latest interest rate cut by the ECB in June is already noticeable for savers at their banks. According to the comparison portal Verivox, regional banks paid an average of 1.69% for savings accounts as of July 15th. This was still 1.72% at the beginning of June. The average for savings accounts at Sparkassen was 0.62%, and for regional cooperative banks it was 0.64%.
"Many banks and Sparkassen have quickly passed on the latest interest rate cut of the European Central Bank to their customers," according to Verivox. Long-term savings rates also fell - from an average of 2.82% at the beginning of June to 2.79% currently.
No relief for homebuyers
Less pleasing for borrowers. For example, mortgage financing is cheaper than in the previous fall, but the conditions have been stabilized at a higher level for several months. The interest rates for loans with a 10-year interest rate commitment were 3.7% according to FMH Financial Consulting, and 3.85% for a 15-year commitment. At least in the coming weeks, there is expected to be little movement in mortgage rates, according to credit brokers.
- The European Central Bank's decision to keep interest rates unchanged in the Eurozone is met with anticipation from currency traders in Frankfurt, as they look towards ECB President Christine Lagarde's June turnaround.
- Despite the ECB's caution, many economists expect the Central Bank to lower interest rates at its next meeting in mid-September, given the economic situation or cycle.
- Lagarde mentioned that the overall inflation in the Eurozone should remain above the target value deep into the next year, but the trend towards high wage growth should abate.
- The ECB's monetary policy is a balancing act, as high interest rates make credit more expensive, which can dampen economic demand, but they are also a burden for the economy and individuals who borrow.
- Heiner Herkenhoff, CEO of the Banking Association, called for caution during the September 12 interest rate decision, stating that the ECB should only lower interest rates if it can reliably approach the 2% inflation mark.
- Germany, being a key member of the European Monetary Union, plays a significant role in these decisions, with the Frankfurt-based Central Bank at the helm.
- Some economists criticize the ECB's turnaround, arguing that the reduction in interest rates is premature since the inflation problem has not yet been resolved.
- The latest interest rate cut by the ECB in June affected savers, with regional banks reducing their savings account rates from an average of 1.72% to 1.69%, according to the comparison portal Verivox.
