- The European Central Bank (ECB) continues to lower the key interest rate level in light of declining inflation.
- The key interest rate is reduced by 0.25 percentage points to 3.5 percent, the central bank announces in Frankfurt.
- Thus, the ECB is advancing its interest rate turnaround that began in June.
The currency guardians expect positive growth impulses from an interest rate cut. Companies and households can invest and consume more easily with cheaper loans. Conversely, savers must brace for falling interest rates at their banks and lower returns on products such as life insurance.
Additionally, the ECB is implementing a technical innovation: it brings 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.
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Keystone/ Boris Roessler)
The central bank decided in March to limit the gap between the two interest rates from September 18 from 0.5 to 0.15 percentage points. Therefore, the main refinancing rate will decrease even more sharply by 0.6 percentage points to 3.65 percent, as the ECB further announced.
Less fluctuation and more predictability
The narrower interest rate corridor is intended to reduce fluctuations in short-term interest rates and create more predictability for banks. For private customers, the step is unlikely to have much impact, as banks already orient themselves to the deposit rate.
Economists had anticipated the ECB’s decision, 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 previous year – the lowest level since summer 2021. In Germany, inflation dropped particularly sharply to 1.9 percent.
German Bundesbank warns against too rapid easing
The ECB initiated the interest rate turnaround in June and lowered the key interest rates for the first time since the inflation wave began. Previously, the central bank had raised interest rates ten times in a row to get a grip on the inflation that soared after the Russian invasion of Ukraine. The inflation in the Eurozone peaked in October 2022 at more than ten percent.
However, the core inflation, which excludes volatile energy and food prices, remains stubborn: it fell only by 0.1 percentage points to 2.8 percent in August. The German Bundesbank, for example, warns against an overly rapid easing of ECB monetary policy. “We are not yet at our goal,” recently cautioned President Joachim Nagel.