The European Central Bank has decided to leave the key interest rate at a record high of four percent. At the same time, there are indications that the monetary authorities will lower interest rates again for the first time at their next meeting on June 6th. Inflation in the monetary union has recently fallen noticeably. In March the rate was 2.4 percent, which is pretty close to the ECB’s target of exactly two percent.
Central bankers are currently still unsure to what extent the high wage increases for employees in many places could further fuel the price surge. The high interest rates have reduced the demand for loans from the economy, which is particularly noticeable in the real estate sector. Nevertheless, the unemployment rate in the euro zone is at its lowest level in history, strengthening the unions’ negotiating position for wages and salaries – despite the weak economic situation in Europe.
“We expect inflation to settle at three percent rather than two percent in the medium term, especially since, in addition to the still strong wage increases, structural factors such as the costs of the energy transition, the aging of society and the reversal of the international division of labor will also be noticeable in the longer term will create inflationary pressure,” said Commerzbank expert Marco Wagner, who expects the ECB to lower the key interest rate in four steps to three percent by spring 2025.
For the fifth time in a row, the ECB is leaving interest rates unchanged
With its decision on Thursday, the ECB left interest rates unchanged for the fifth time in a row. The deposit rate, which the central bank sees as the most important control instrument because it generates interest on the banks’ reserves, is four percent. This is the highest level in the history of the monetary union. The main refinancing rate at which banks can obtain fresh money from the central bank has been 4.5 percent since September 2023. In the fight against high inflation, the ECB had raised interest rates ten times in a row since July 2022, most recently in September 2023. As a reminder: in October 2022, inflation was more than ten percent.
The situation in the USA is a little different. The economy there is doing a lot better and inflation climbed to 3.5 percent in March. The American Federal Reserve will therefore probably wait to turn interest rates; most experts now expect that the Fed will only lower the key interest rate again for the first time after the US elections in November. Until now, it had been assumed that the monetary authorities in the euro zone and the USA would act at the same time. If the ECB lowers interest rates earlier than the Fed, this will lead to price fluctuations in the foreign exchange and bond markets. Of the leading central banks, only the Swiss National Bank has so far lowered interest rates.
Even if the ECB is still waiting to cut interest rates, the German banking sector is already preparing for it, to the detriment of customers. “For the first time since the interest rate change, daily interest rates for German private investors fell across the market in February,” according to calculations by the data analysis company Barkow Consulting, which were published on Thursday. After the ECB’s key interest rate increases, the average overnight interest rate at banks climbed to 1.6 percent – in February the value was only 1.49 percent. This represents an early adjustment to possible interest rate cuts by the central bank, which would not have been expected for a few months, the analysts write. “Remarkably, Germany is the only country in the euro area where overnight interest rates fell again in February,” Barkow Consulting continued. Savings banks in particular are criticized in this country because they fob off customer deposits with low interest rates, while the financial institutions themselves collect the high deposit interest rate of four percent from the ECB.