Inflation is falling and the European Central Bank (ECB) is reacting: it is lowering interest rates for the second time this year. The so-called deposit rate is now at 3.5 percent. This has consequences not only for savers.
The European Central Bank (ECB) is reacting to the declining inflation in the eurozone. The deposit rate, which is the benchmark on the financial market and which banks receive when they park money with the central bank, is falling by 0.25 percentage points to 3.5 percent. This was announced by the central bank in Frankfurt am Main.
At the same time, just a few weeks before the next meeting in October, the monetary authorities around ECB President Christine Lagarde are leaving open how monetary policy will proceed: “The ECB Governing Council does not commit itself in advance to a specific interest rate path.”
Main refinancing rate decreases by 0.6 points
The so-called main refinancing rate, at which banks can borrow money, will be reduced by 0.6 points to 3.65 percent with the latest decision. The monetary authorities hope that a reduction in interest rates will have a positive impact on growth.
At the same time, the reduction in key interest rates will tend to make it cheaper for companies and private individuals to take out loans. Conversely, savers must prepare for falling interest rates at their banks and lower returns on things like life insurance. The conditions for fixed-term deposit accounts, for example, had already worsened beforehand.
Before the interest rate turnaround in June, the ECB had kept interest rates high for a long time in the fight against inflation. This was intended to keep inflation in the eurozone under control. Most recently, it had fallen to 2.2 percent – the lowest level in three years. In Germany, it was even lower at 1.9 percent.
Fuest: “Interest rate cut justifiable”
Many analysts and banks praised the cautious course of the monetary authorities. Clemens Fuest, President of the ifo Institute, was one example. He said: “The ECB's interest rate cut is justifiable.” In view of the falling inflation in recent months and the weak economic outlook, an easing of monetary policy could be justified. However, one should not go too far because of the ongoing risk of inflation.
Fuest dampened expectations that the interest rate cut could provide an economic boost: “This interest rate cut will not have an immediate impact on the economy because it was already priced in by the markets.”
Any more steps before the end of the year?
Friedrich Heinemann from the ZEW Institute stressed: “This interest rate cut was inevitable.” The decisive argument was not even the recent approach of inflation to the central bank's two percent target – but the increasingly poor growth prospects for Germany. “Because growth in the largest economy in the eurozone has come to a standstill and there is even a threat of recession, the way has been cleared for two to three interest rate cuts by the end of the year.”
The failure of the German growth engine is putting pressure on the entire Eurozone and is therefore also dampening price pressure. Heinemann expects that the Eurozone – unlike the USA – is heading for a “hard landing on its way out of inflation”.
Core inflation still quite high
Criticism came from the European Trade Union Confederation (ETUC). It believes the reduction is not far-reaching enough. ETUC General Secretary Esther Lynch said: “While this reduction is a step in the right direction, it is not enough to ease the financial pressure that record interest rates have placed on workers or to unlock much-needed investment.”
The ETUC also referred to the report just presented by former central bank chief Mario Draghi, who warned that high interest rates could make public debt too big a problem and negatively affect investments in the “green” and digital transition.
Inflation expert Emmanuel Mönch from the Frankfurt School of Finance and Management, on the other hand, pointed to the ongoing rise in prices. “The overall inflation rate has fallen sharply, but this is mainly due to the sharp fall in energy and food prices,” said the economist. “If you look at services and other goods, the inflation rate is still quite high, so in my view it was not necessarily necessary to lower interest rates.”
With information from Ursula Mayer, Hessischer Rundfunk.
