Euro currency guardians begin descent from interest rate summit
Published: Thursday, Jun 6th 2024, 16:30
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For the first time since the wave of inflation, the euro currency guardians have lowered interest rates in the eurozone again. After almost nine months at a record high, the European Central Bank (ECB) reduced the deposit rate that banks receive for parked money by 0.25 percentage points to 3.75 percent.
The central bank left open how many further interest rate cuts will follow and at what pace. "The ECB Governing Council does not commit itself in advance to a specific interest rate path," said ECB President Christine Lagarde in Frankfurt on Thursday. Decisions depended on the development of economic data.
"We will decide meeting by meeting". The next few months are likely to be bumpy, said Lagarde with a view to inflation. Many economists currently expect the next interest rate cut in September after a pause in July.
Loans become more favorable
The interest rate at which banks can obtain fresh money from the central bank is falling from 4.5 percent to 4.25 percent. Lower interest rates are good news for borrowers, as they make loans more affordable.
Savers, on the other hand, must be prepared for the fact that they will tend to receive less interest from the bank if they put money on the high side. However, as the central bank's decision was expected, many banks have already adjusted their conditions.
Inflation target not yet reached
According to many economists, the threat of inflation has not been banished for good. "The inflation target has not yet been reached. And it may well be that stubborn residual inflation will make further interest rate cuts very difficult in the coming quarters," says Dekabank chief economist Ulrich Kater.
Inflation in the eurozone has recently picked up again somewhat. In May, consumer prices rose by 2.6% year-on-year after 2.4% in April. However, inflation is now a long way off the record high of 10.7% in fall 2022.
Higher inflation rates reduce the purchasing power of consumers. They can then afford to spend one euro less.
According to the central bank's latest forecast, inflation in the eurozone will fall somewhat more slowly than recently expected. The ECB now expects an inflation rate of 2.5 percent for the current year, compared to the 2.3 percent predicted by the central bank in March.
A rate of 2.2% is expected in 2025 (March forecast: 2.0%). The ECB is aiming for price stability in the eurozone in the medium term with an annual inflation rate of 2%.
Economy in particular benefits from lower interest rates
In order to get a grip on the sharp rise in inflation following the start of the Russian war of aggression against Ukraine, the ECB had raised interest rates ten times in a row since July 2022 before taking a break.
This has made loans more expensive. This can curb demand and counteract high inflation rates. More expensive financing is also a burden for the economy and private individuals who want to borrow money. This can slow down the economy.
According to Moritz Schularick, President of the Kiel Institute for Economic Research (IfW), by lowering interest rates, the euro currency guardians are also setting the course for the economic recovery of the German economy, which is very important for Switzerland: "Unlike in the past, the German economy in particular is currently dependent on lower interest rates, while other euro countries have coped better with the previous interest rate level."
The ECB has become somewhat more confident about the economy in the eurozone with its 20 members for the current year: The central bank now expects gross domestic product (GDP) to increase by 0.9 percent. In March, the central bank had still expected economic growth of 0.6 percent for 2024.
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