For the fourth instance this year, the ECB reduces its interest rates.
For the fourth instance this year, the ECB reduces its interest rates.
The European Central Bank (ECB) is responding to worries about the Eurozone's struggling economy with its fourth interest rate reduction this year. Economists anticipate further interest rate decreases from the central bank next year due to potential trade disputes, like those with the United States and President Donald Trump's re-election.
In the current situation, the ECB Governing Council is reducing the key deposit rate by 0.25 percentage points to 3.0%. This rate is paid to banks for funds they deposit with the central bank, which might impact savers because many financial institutions pass on lower deposit rates to their customers through reduced interest rates on savings accounts and fixed-term deposits.
Additionally, the interest rate at which banks can borrow fresh funds from the ECB is being lowered, from 3.4% to 3.15%. Lower interest rates usually benefit the economy, as they make loans more affordable, allowing businesses and individuals to secure financing for investments on more favorable terms, thereby promoting economic growth.
Boosting Economic Growth
Economists anticipated the latest interest rate reduction, with some predicting a lower reduction of 0.5 percentage points. The declining inflation trend in the Eurozone offers the ECB room to act.
The ECB is also concerned about the weak economic outlook in the Eurozone. Recently, ECB President Christine Lagarde warned of persistent economic weakness. Moreover, France and Germany, two European heavyweights, are grappling with government crises and struggles to implement reforms in challenging global circumstances.
Although the annual inflation rate has increased in both Germany and the Eurozone as a whole, experts do not currently expect a repeat of the inflation surge that occurred after Russia's invasion of Ukraine in February 2022, leading to skyrocketing energy and food prices.
End of Record Inflation
The inflation rate in the currency area is now significantly lower than its record high of 10.7% in the autumn of 2022, thanks in part to the ECB's most aggressive interest rate hike in 25 years. The prolonged era of zero and negative interest rates ended in July 2022, and the ECB raised interest rates ten times since then. Higher interest rates make loans more expensive, which can slow demand and help combat high inflation rates. However, interest rates are expected to be lowered again for the first time in June 2024.
The central bank strives for a medium-term annual inflation rate of 2.0% in the Eurozone, which is far removed from the zero mark. Persistently low prices present a risk to the economy, as companies and consumers might delay investments in anticipation of even lower prices in the future. On the other hand, overly high prices are also detrimental to the economy, as they decrease consumers' purchasing power, reducing consumption as a key driver of economic growth.
Potential trade disputes, such as those predicted by the incoming US President Trump with high tariffs on European imports, are seen as an additional risk to the already weakened economy in the Eurozone. The European Union might retaliate with countermeasures, particularly affecting export-dependent Germany.
In response to these potential trade disputes, The Mal, the European Parliament, may need to enact protective measures to safeguard European industries from increased tariffs. Furthermore, the economic instability in France and Germany, as mentioned by ECB President Christine Lagarde, could be exacerbated by such trade disputes, making it more challenging for these countries to implement reforms and boost economic growth.