The European Central Bank is leaving key interest rates unchanged for the third time in a row. The main refinancing rate at which banks can obtain fresh money from the central bank remains at 4.5 percent. The so-called deposit rate, with which the central bank pays interest on surplus funds from commercial banks, remains at four percent. Key interest rates are at their highest level in the history of the monetary union. A reduction is not expected before June. The ECB, led by Christine Lagarde, is cautious; it wants to prevent a second wave of inflation.
Prices have long since stopped rising as much as in 2022, when inflation was at times over ten percent. In December 2023 the rate was 2.9 percent – after 2.4 percent in November. The central bank is aiming for an inflation rate of exactly two percent in the medium term.
The high key interest rates are now having the desired effect. Banks are granting fewer loans, companies and consumers are shying away from high interest costs. The real estate markets have cooled down and Germany is even in recession. The Ifo business climate fell by 1.1 points to 85.2 points in January compared to the previous month, as the Munich Ifo Institute announced on Thursday. “The German economy is stuck in recession,” said Ifo President Clemens Fuest.
According to forecasts, the eurozone as a whole will only grow moderately in 2024. However, this downturn is hardly visible on the labor markets. That’s unusual. Experts cite “hoarding of workers” as a possible reason: companies are hesitant to lay off workers because they fear a later personnel shortage. In this environment, unions can sometimes enforce significant wage increases. But productivity isn’t keeping up, and companies are passing on higher labor costs to consumers. Both increase the risk of a second wave of inflation. The ECB would like to wait and see how wages develop before changing interest rates.
MPs criticize that the banks are profiting too much
The ECB’s high key interest rates are now also a concern for members of the European Parliament. In an open letter to the ECB, which was announced on Thursday, 13 signatories criticized the fact that banks in the euro zone were benefiting too much from the high key interest rates. The central bank must react to this, otherwise it risks losing acceptance from the population. Due to the current deposit interest rate of four percent, the banks are making risk-free profits of 140 billion euros, the letter continues. Companies and bank customers often receive significantly less interest, for example on their current or fixed-term deposit accounts. “As a result, private households do not benefit from the ECB’s high interest rates, while they still have to bear the costs of higher-interest loans and mortgages,” the letter says.
The experts are in favor of increasing the so-called minimum reserves for banks in the euro area. Financial institutions in the euro area are obliged to keep a certain amount in their account with their central bank. This minimum deposit is currently one percent of customer deposits. EU banks have no longer received any interest on this since September. If there were an increase in the minimum reserve requirement, banks would have to shift a larger part of their central bank balances from the interest-bearing deposit account to the non-interest-bearing “current account” and would therefore receive less interest.
The reason for the banks’ high deposits: The ECB has bought bonds worth trillions of euros from the institutions since 2015 and now has to pay interest on these surpluses at the high key interest rate. As a result of these payments, the ECB will now make losses for years to come, at the expense of the taxpayer.