ECB leaves interest rates in the eurozone unchanged
Published: Thursday, Jan 25th 2024, 16:20
Updated At: Thursday, Jan 25th 2024, 16:20
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The economy in the eurozone is weakening and an interest rate cut could give the economy a boost. However, the euro currency guardians do not yet see the time for interest rate cuts.
Despite growing concerns about the economy, the euro currency guardians are not giving in to calls for an interest rate cut for the time being. The key interest rate at which banks in the eurozone can obtain fresh money from the European Central Bank (ECB) will remain at 4.5 percent for the time being. This was decided by the ECB Governing Council at its first meeting of the new year on Thursday.
There is a consensus in the ECB Governing Council "that it is premature to discuss interest rate cuts", said ECB President Christine Lagarde in Frankfurt after the deliberations of the central bank's highest decision-making body. At the World Economic Forum in Davos, Lagarde had said that an interest rate cut this summer was quite likely.
In July 2022, the ECB ended the years of zero and negative interest rates in order to get high inflation under control. The central bank raised interest rates ten times in a row. Higher interest rates make loans more expensive, which can curb demand and counteract high inflation rates. However, more expensive loans are also a burden on the economy because credit-financed investments become more expensive.
Interest rate cuts would relieve the economy
Rasmus Andresen, spokesperson for the German Greens in the European Parliament, argued that the high interest rates were making necessary investments more difficult: "The ECB should therefore overcome its fear and lower interest rates at the next Council meeting at the latest."
Friedrich Heinemann from the ZEW-Leibniz Center for European Economic Research in Mannheim, Germany, commented: "Of course, the poor economic situation in the eurozone actually argues for a rapid interest rate cut. But the EU treaty is clear on such conflicting objectives: price stability has priority over economic stabilization in the ECB's target system." A number of economists expect the first interest rate cut to take place in June at the earliest.
The ECB's primary goal is to ensure a stable euro. The currency guardians believe this will be achieved if prices do not rise too sharply: In the medium term, the central bank is aiming for price stability with an inflation rate of two percent. Higher inflation rates reduce the purchasing power of consumers - they can afford less for one euro.
High inflation not yet conquered
Inflation in the eurozone accelerated again in December: according to provisional data, consumer prices were 2.9% higher than in the same month of the previous year after 2.4% in November. Core inflation, excluding volatile energy and food prices, fell from 3.6% to 3.4% in December.
Overall, it is too early to "announce a victory over inflation", commented Iris Bethge-Krauss, Managing Director of the Association of German Banks (VÖB): "Interest rate cuts do not fit into an environment characterized by uncertainties with regard to supply chains and wage trends in companies."
Jörg Asmussen, Managing Director of the German Insurance Association (GDV) and former member of the ECB Executive Board, expects the ECB to approach interest rate cuts very cautiously: "The turnaround in interest rates will come later and be less pronounced than currently priced in by the markets."
Savings interest rates are already falling again
The deposit interest rate that banks receive for parked money remains at 4.0% following the ECB Governing Council's decision on Thursday. Despite key interest rates remaining high, savings interest rates have already fallen again in some cases: according to an analysis by the comparison portal Verivox, the sharpest fall was in fixed-term deposits, which are invested for five years.
On average, banks active nationwide were offering 2.81 percent interest as of January 19. At the beginning of the year, it was 3.01 percent. The average interest rate for overnight money for offers available nationwide was therefore virtually unchanged at 1.72%.
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