On June 6, the European Central Bank (ECB) decided to lower key interest rates by 0.25 percentage points. This is an important decision based on a reassessment of inflation and the economic situation. After nine months of steady interest rates, it was time to ease them slightly.
New interest rates as of June 12, 2024
- Main refinancing operations: 4.25%
- Marginal lending facility: 4.50%
- Deposit facility: 3.75%
Why were interest rates lowered?
Inflation has fallen by more than 2.5 percentage points since September 2023. Long-term inflation expectations have also declined. The ECB's strict monetary policy has helped to dampen inflation by reducing demand and stabilizing inflation expectations.
How are the markets reacting?
The stock markets have reacted somewhat negatively to the interest rate cut. This could be because further interest rate cuts are now less likely. The ECB has raised its inflation forecasts and indicated that it does not envisage any further interest rate cuts for the time being. This uncertainty may make investors cautious.
What does the future hold?
Despite falling inflation, price pressure remains high due to rising wages. Inflation is expected to remain above target until next year. Experts estimate total inflation of 2.5% for 2024, 2.2% for 2025, and 1.9% for 2026. Economic growth is estimated at 0.9% for 2024, 1.4% for 2025, and 1.6% for 2026.
What will happen to the euro?
Despite the interest rate cut, the euro has risen slightly against the US dollar. Normally, an interest rate cut would lead to a devaluation, as lower interest rates are less attractive to investors. The rise of the euro could indicate that investors have confidence in the stability of the European economy.
Impact on real estate and financing
The interest rate cut could affect the real estate market. Real estate prices could fall further, especially if long-term financing expires and new loans are no longer available due to lower interest rates. This could lead to more real estate sales, as owners may be forced to sell their homes to meet their financial obligations.
Asset Purchase Programs (APP) and Pandemic Emergency Purchase Program (PEPP)
The APP holdings will be reduced at a gradual and predictable pace, as the Eurosystem will not reinvest the principal payments as they mature. The PEPP portfolio will be reduced by an average of €7.5 billion per month in the second half of the year, and the reinvestment of principal payments is to be stopped at the end of 2024.
The ECB has lowered interest rates because the inflation outlook has improved. This is a positive sign, but the future remains uncertain, especially with regard to future interest rate policy and the achievement of the inflation target. Investors and market participants should closely monitor developments and adjust their strategies accordingly.
