The European Central Bank has reduced the deposit rate by 0.25 percentage points. How does this affect savers and the economy.
It seems that the European Central Bank need not worry about inflation for the time being. Inflation in the euro area was only 1.7 percent in September, after being 4.3 percent a year ago. Even the prices of services, which have consistently achieved annual growth rates of over four percent in recent months, weakened. In September they rose “only” 3.9 percent.
However, the ECB Council, which met this time in Frankfurt but in Ljubljana, Slovenia, cut key interest rates again on Thursday. For the third time this year. The deposit rate, which has been considered the benchmark interest rate for some time, falls by 0.25 percentage points to 3.25 percent. Banks get this value if they deposit their money with the central bank by the next day.
This year is probably not the last interest rate cut for the ECB. Even if, as is well known, she did not lean out of the window with prior notice.
No retreat?
In its last economic forecast, the ECB expected economic growth of 0.8 percent for the euro area. However, this pales in comparison to China, which is currently pulling out all the stops to achieve economic growth of five percent at the end of the year. The US still expects 2.5 percent growth for 2024.
Demand for corporate loans in the Eurozone increased again for the first time in two years due to falling interest rates. But overall it is still weak, as the ECB announced at the beginning of the week.
“Given the delay in the effectiveness of monetary policy and the ongoing economic weakness, it is time for us to end the restraint on monetary policy. But the ECB is still far from that and interest rates will continue to slow down economic development even after the main interest rate cut to three percent expected in December,” said Sebastian Dullien of the IMK Institute A union-affiliated German.
Although the ECB did not expect a recession in its member states recently, they have developed very differently. Some countries are suffering more than others due to the slowdown in industrial activity, according to central bank minutes. “In particular, the weak growth of the largest economy in the euro area slowed down growth in the euro area,” he says in the minutes, taking aim at Germany. The Federal Republic is expecting a second consecutive year of recession this year, as is Austria.
“The ECB’s focus has shifted from inflation being too high to growth being too weak,” said Paul Hollingsworth, chief European economist at BNP Paribas. “From a risk management perspective, accelerating the pace of mitigation is worthwhile, although caution is still needed given the high level of uncertainty.”
What does this mean for savers?
Of course, the ECB’s interest rate cuts also affect savers. According to an analysis by the comparison portal Durchblicker, daily interest rates have fallen from a maximum of three percent to 2.8 percent since the beginning of the year. For so-called fixed term deposits, which are assessed for a period of three years, you now get only three percent instead of the earlier four percent. This could be one of the reasons why savers are not trying so hard to find good conditions anymore. Savings interest comparisons at Durchblicker increased by 42 percent between January and September compared to the previous year. “Some banks have not yet fully priced in the ECB’s interest rate cut. This means that good conditions are still available that are much higher than September’s inflation of 1.8 percent,” says Durchblicker expert Andreas Ederer.
Borrowers also fare better. For fixed interest loans with a term of 25 years, you only need to pay 3.3 instead of 4.1 percent compared to October of the previous year. Convertible loans cost 4.375 percent. Fixed interest loans are still cheaper than variable ones, says Durchblicker. Demand for real estate loans remains stagnant.