European Central Bank – Falling inflation, weak economy – ECB cuts interest rates – Economy

Frankfurt/Main (dpa) – The European Central Bank (ECB) is reacting to the dwindling inflation in the eurozone and is lowering interest rates. The benchmark deposit rate that banks receive when they park excess money with the central bank is falling by 0.25 percentage points to 3.5 percent. The central bank in Frankfurt announced this. The ECB is thus making progress with the interest rate turnaround that began in June.

The latest inflation data were largely as expected, said ECB President Christine Lagarde. However, she remained tight-lipped about further interest rate hikes in the coming months. “The ECB Governing Council does not commit itself to a specific interest rate path in advance.”

Interest rate cuts support the economy with a time delay. Companies and private households can invest and consume more easily when loans are cheaper. Conversely, savers have to prepare for falling interest rates at their banks and lower returns on life insurance policies, for example.

Successes in the fight against inflation

Economists had expected the interest rate cut, as inflation in the eurozone had recently approached the ECB's medium-term target of two percent: In August, the inflation rate fell to 2.2 percent compared to the same period last year – the lowest level since summer 2021.

As recently as October 2022, inflation in the euro area had reached a high of over ten percent in the wake of the war in Ukraine. Inflation in Germany has also recently fallen significantly, to just 1.9 percent in August.

Inflation in the euro area will average 2.5 percent in 2024 and will decline toward the inflation target in the course of the second half of 2025, the ECB said. It is therefore appropriate to further loosen monetary policy.

Economic situation in Europe weak

At the same time, the ECB is faced with a weak economy in the eurozone. They expect growth of only 0.8 percent in 2024 – slightly less than predicted in June (0.9 percent). The economy will only recover in the following years.

Ifo President Clemens Fuest described the interest rate move as “justifiable”. However, further interest rate cuts only seem appropriate if inflation continues. “This interest rate cut will not have an immediate impact on the economy because it was already priced in by the markets.”

ECB narrows interest rate corridor

Meanwhile, the ECB is implementing an innovation in its monetary policy. It is bringing the deposit rate closer to the rate at which banks can obtain fresh money from the central bank (“main refinancing rate”). This was previously known as the most important key interest rate, but the central bank now de facto controls its monetary policy via the deposit rate.

In March, the ECB decided to limit the gap between the two interest rates to 0.15 percentage points from September 18. The main refinancing rate therefore fell even more sharply, by 0.6 percentage points to 3.65 percent, the ECB further announced. The narrower corridor is intended to reduce fluctuations in short-term interest rates and create more predictability for banks. This is unlikely to have much of an impact on private customers.

Warnings against faster easing

The ECB initiated the interest rate turnaround in June and lowered key interest rates for the first time since the wave of inflation. The financial markets are firmly expecting further interest rate cuts by the ECB

However, inflation risks remain. Core inflation, which economists pay a lot of attention to, is holding out without the volatile prices of energy and food. The ECB sees this rate at 2.9 percent on average for the year and only at 2.0 percent in 2026. Pressure is coming from rising wages, which are making services more expensive. The Bundesbank, for example, is warning against easing monetary policy too quickly.

Heiner Herkenhoff, CEO of the Association of Banks, also believes that the monetary authorities cannot yet switch to “relaxation mode”. The ECB must demonstrate tact. “This also includes countering public expectations of rapid succession of interest rate cuts.”

Debtors benefit – but little movement in building interest rates

Falling key interest rates have far-reaching consequences: companies and private households can obtain loans more cheaply, which facilitates investment and causes consumption.

There are no necessarily favorable conditions for home builders. Construction interest rates depend on the yield on ten-year federal bonds. Commerzbank, for example, expects interest rates for ten-year real estate loans to remain at around 3.5 percent until next year – similar to the recent level. Further cuts in key interest rates by the ECB have been priced into the market.

Savers are at a disadvantage

Falling key interest rates are bad for savers. Many banks have already reacted to this: According to the comparison portal Verivox, fixed-term deposit interest rates over two years were recently at their lowest since May 2023. Offers available nationwide therefore only yield an average of 2.68 percent. Large-scale interest rate cuts are to be expected for overnight money.

The good news: The lower inflation rate is indirectly helping savers. After deducting the inflation rate, which was 1.9 percent in Germany in August, investors can achieve a positive return on an average fixed-term deposit over two years. In the midst of the wave of inflation a year ago, however, savings lost value.

© dpa-infocom, dpa:240912-930-230628/3