Expected step

ECB follows up: Key interest rates lowered again

The ECB is sticking to its course and lowering its key interest rates again.

(Bild: APA/dpa/Boris Roessler)

In view of the decreasing risk of inflation, the European Central Bank has lowered its key interest rate again following its monetary policy turnaround in June. The deposit rate, which is decisive for the financial markets and at which banks park surplus funds with the ECB in the short term, was cut by a quarter of a percentage point to 3.5 percent on Thursday. The financial markets had expected this.

At the same time, the monetary authorities led by ECB President Christine Lagarde are leaving the future of monetary policy open just a few weeks before the next meeting in October: "The ECB Governing Council does not commit to a specific interest rate path in advance."

Expert warns: "Inflation rate remains high"
The Managing Director of the German Insurance Association, Jörg Asmussen, spoke of the interest rate cut as a positive and reassuring signal to the markets: "Nevertheless, the ECB should continue to show tact. On the one hand, we continue to see high inflation rates in the services sector, which means that the inflation rate could also prove to be stubborn in the future." On the other hand, the ECB should not miss the right timing for further interest rate hikes, explained the former ECB Executive Board member.

ECB wants to create incentives for credit transactions
The main refinancing rate, at which commercial banks can borrow money from the ECB for one week, will be reduced by 0.6 points to 3.65 percent with the decision. The fact that the step downwards is greater than for the deposit rate is the result of changes already made by the ECB in the spring. At that time, it had decided to reduce the gap between the deposit rate and the main refinancing rate. In doing so, the ECB wants to create incentives to participate in its weekly lending operations and at the same time limit the extent of market interest rate fluctuations.

(Bild: Krone KREATIV/stock.adobe.com)

If short-term interest rates fluctuate too much, Joachim Nagel, head of the German Bundesbank, believes that the signal regarding the intended monetary policy course could be distorted, which would at some point impair its effectiveness. However, the deposit rate remains the central monetary policy interest rate. This is because it sets the lower limit on the money market - the lowest interest rate at which banks lend money to each other.

Loans could soon become cheaper
The banks in the eurozone still have around three trillion euros in excess liquidity that they can park with the ECB. Over time, this is likely to decrease and banks could switch to borrowing more money from the ECB. The narrower interest rate corridor should help the ECB to better manage market interest rates. The key interest rate cuts will tend to make it cheaper for companies to take out loans, while savings deposits such as overnight or fixed-term deposits will yield less. Before the turnaround in interest rates in June, the central bank had kept interest rates high for a long time in the fight against inflation in order to keep inflation in the eurozone in check.

Falling energy prices pushed the inflation rate down to 2.2 percent in August - the lowest level for a good three years. As in the June projections, ECB experts now expect overall inflation in the eurozone to reach 2.5% this year and fall to 2.2% in 2025. In 2026, it is expected to be 1.9 percent.

The monetary watchdogs around ECB head Christine Lagarde are keeping investors guessing ahead of the next meeting in October: "The ECB Governing Council does not commit to a specific interest rate path in advance." According to Lagarde, the interest rate decision was taken unanimously. However, the Frenchwoman did not reveal whether there could be a further interest rate cut as early as next month at the ECB Governing Council's external meeting in Ljubljana, Slovenia. In principle, interest rates are on a downward path. However, the ECB has not committed itself in advance - neither with regard to the timing nor the scope of the next interest rate cut. This would depend on the economic data. It is very likely that inflation will be low in September due to statistical base effects with regard to energy costs. However, the ECB does not base its course on individual data, but on a "whole series of indicators".

Inflation is likely to rise again
However, the ECB experts expect inflation to rise again in the last part of the current year. This is partly due to the fact that previous sharp falls in energy prices are no longer included in the annual rates: "Inflation should then fall back towards our target value in the course of the second half of next year."

The central bank economists also only expect economic growth of 0.8% in the eurozone this year. Gross domestic product is expected to grow by 1.3 percent in 2025 and 1.5 percent in 2026. In June, ECB economists were still forecasting figures of 0.9 percent for 2024, 1.4 percent for 2025 and 1.6 percent for 2026.