On December 12, 2023, the European Central Bank cut its key interest rates for the fourth time this year, lowering the deposit rate to 3%. With inflation in the eurozone declining to 2.3%, experts anticipate continued rate reductions to stimulate economic growth. Predictions suggest favorable lending conditions for businesses and borrowers in 2025, with mortgage rates expected to drop. The ECB may also revise its communication strategy to enhance transparency and boost confidence in the lending market.
ECB Lowers Key Interest Rates for the Fourth Time in 2023
On December 12, the European Central Bank (ECB) made headlines by reducing its key interest rates for the fourth time this year. This adjustment brings the deposit rate, which serves as the reference rate, down to 3%. This decision was widely anticipated, with analysts surveyed by Reuters and François Villeroy de Galhau, the Governor of the Bank of France, suggesting an even larger cut of 0.5 points could be on the horizon.
Inflation Trends and Economic Outlook
The ECB has taken note of a significant decline in inflation rates across the eurozone. As reported by Eurostat, inflation in November was recorded at 2.3%, which, despite a slight increase of 0.3 points, remains near the ECB’s target of 2%. This follows a peak inflation rate of 10.6% in October 2022. However, underlying inflation—excluding the volatile energy and food prices—continues to hover at 2.7%.
Given the current economic climate, experts predict that the ECB will persist in lowering its deposit rate, especially as growth across Europe remains sluggish. The European Commission estimates a modest growth of 0.8% in the eurozone for 2024. Eric Dor, director of economic studies at IESEG School of Management, states, “The ECB is attempting to stimulate a general decline in interest rates for businesses and households, hoping this will lead to increased spending driven by credit.” This, in turn, could potentially enhance economic growth.
Looking ahead to 2025, businesses and borrowers can expect a favorable lending environment, as banks are likely to be incentivized to lend funds rather than deposit excess liquidity with the ECB. This shift could lead to a surge in affordable mortgage loans aimed at attracting customers. In stark contrast, between 2022 and 2023, banks had significantly raised borrowing rates, with the ECB’s deposit rate escalating from -0.5% to 4%. While many financial institutions foresaw this rate reduction, their future actions will depend largely on the ECB’s direction.
Analysts are already forecasting further monetary easing in 2025. François Rimeu, a senior strategist at Crédit Mutuel Asset Management, predicts, “The reduction of interest rates towards the ‘neutral’ zone—estimated to be around 2%—is expected to continue in the upcoming months.” Eric Dor confirms this goal, indicating that the ECB aims to reach the neutral rate by mid-2025.
As we approach the start of 2025, average mortgage rates, currently at 3.37%, are projected to decrease to approximately 3.2% in the coming months, according to estimates made this summer by Philippe Crevel, director of the savings circle. The Crédit Logement CSA Observatory also predicts a decline to 3.25% by year-end, across all loan durations. “Banks are closely monitoring the ECB’s announcements and are likely to continue lowering their rates in the near future,” predicts Eric Dor.
To bolster confidence among banks, the ECB might consider altering its communication strategy. Eric Dor notes, “Prior to the inflationary energy crisis of 2022, the ECB would announce its decisions ahead of meetings.” Although this practice has been set aside, there are indications that it may be reinstated, as suggested by François Villeroy de Galhau. Such transparency would be advantageous for the real estate market, as it would encourage lenders to issue more loans.