2024-09-12 19:07:35
Decision at the central bank
This is not good news for savers
Updated on 12.09.2024 – 14:57Reading time: 4 min.
The ECB is taking another interest rate step: the central bank is reducing the deposit rate, which is important for savers, by 0.25 percentage points.
In view of the declining inflation, the European Central Bank (ECB) is lowering the key interest rate level further. After the monetary policy turnaround in June, it increased it for the first time on Thursday: the deposit rate, which is crucial for the financial markets – and for Germany’s savers – and at which banks can invest surplus funds with the ECB in the short term, was cut from 3.75 to 3.50 percent.
The 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 interest rate for short-term borrowing, the marginal lending rate, will also fall to 3.9 percent.
The fact that the step downwards for both lending rates is greater than for the deposit rate is the result of changes to the ECB’s operational framework that were already finalized in the spring. t-online explains the most important questions surrounding the central bank’s current interest rate cut.
Falling energy prices pushed the inflation rate down to 2.2 percent in August – the lowest level in over three years. The ECB Governing Council has now reiterated its determination to ensure that inflation returns to the medium-term objective of two percent in the near future.
Determining the appropriate level of interest rates will continue to depend on the data available in the future. This will be decided from meeting to meeting.
The current interest rate cut is bad news for savers, but good news for home builders. But first things first.
Anyone who has invested their money in a current or fixed-term deposit account has been able to enjoy high savings interest rates for some time. However, now that the ECB is actually lowering its interest rates, these banks are also likely to adjust their current interest rates to the corresponding amount.
The result: consumers get less return. However, many banks had already factored cuts into their calculations before the ECB’s first interest rate hike in June. As a result, conditions have already worsened in many places.
- ECB monetary policy: What key interest rates have to do with you
The situation is similar with loan interest rates – only in reverse. The ECB’s main refinancing rate allows commercial banks to borrow money from the central bank (see below). It has a noticeable effect on building interest rates, for example, because the banks indirectly pass the costs on to their customers.
“But construction interest rates often move earlier than the ECB changes the key interest rate,” explained loan broker Dr. Klein. In October 2023, construction interest rates were still well above four percent, at the end of the year they fell, moved sideways and rose slightly again between June and July before moving downwards again in August.
To understand this, you need to know that the ECB has three interest rates that the central bank adjusts regularly: the deposit rate, the so-called marginal lending rate and the main refinancing rate.
For a long time, the main refinancing rate was referred to as the “key interest rate”. In fact, however, all three rates are the central bank’s key interest rates – the most important key interest rate for savers is the deposit rate:
- Main refinancing rate: This is the interest rate at which credit institutions can borrow money from the central bank for at least one week. In return, commercial banks must provide collateral such as securities to guarantee repayment. This interest rate also affects consumers: financial institutions usually pass on the higher interest rates to their customers, making loans more expensive.
- Deposit interest: The interest rate has recently become more important for savers. For years, this interest rate was negative, meaning that not only the banks but also savers had to pay more for their accounts. Consumers are now benefiting from rising interest rates, for example on current or fixed-term accounts. At the same time, banks have also made large profits from this interest rate over the past two years. The deposit rate is now considered the ECB’s most important key interest rate.
- Marginal lending rate: The value indicates the conditions under which commercial banks can borrow money from the ECB in the short term, i.e. overnight. This is intended to prevent banks from experiencing short-term liquidity bottlenecks. It is always slightly above the main refinancing rate and effectively forms the upper interest rate limit for overnight money.
Back in March, the ECB announced that it would reduce the gap between the deposit rate and the main refinancing rate to 0.15 percentage points. Regardless of the interest rate cut, the latter will fall by at least 0.35 percentage points – with the interest rate cut of 0.25 points, this means a total of 0.6 points. As a result, the main refinancing rate is now at 3.65 percent (previously: 4.25 percent).
The same applies to the marginal lending rate. However, the gap to the main refinancing rate is to remain at 0.25 percentage points, meaning the interest rate will fall by a total of 0.6 points to 3.9 percent (previously: 4.5 percent). According to the information, this is a technical adjustment – without any signaling effect.
That remains to be seen. Just a few weeks before the next meeting in October, the monetary authorities around ECB President Christine Lagarde have left open what the future holds in terms of monetary policy: “The ECB Governing Council does not commit itself to a specific interest rate path in advance.”
This has also been the argument of the ECB so far, which has repeatedly referred to the “data-based approach” in its decisions.