The ECB lowers its key rate again in the face of slowing inflation. A decision with serious consequences for European households and businesses. Deciphering the issues of this new monetary situation…
News that has not gone unnoticed in economic and financial circles. This Thursday, the European Central Bank announced a 0.25 point cut in its main key rate, bringing it to 3.25%. A decision motivated by the slowdown in inflation in the euro zone, which fell to its lowest level in 3 years last September.
A strong signal sent to the markets
By lowering its key rate for the second time in a row, after a first cut in June, the ECB is sending a clear message. Faced with a economic growth considered worrying in the euro zone, the monetary institution wishes to support activity by easing credit conditions.
This decision was anticipated by a majority of investors and analysts. According to a source close to the ECB, consensus was formed during this Thursday’s meeting in Ljubljana, Slovenia, on the advisability of a moderate drop in ratesrather than a status quo.
Inflation in the Eurozone under control
To justify this more accommodating orientation of its monetary policythe ECB bases itself on the latest inflation figures. In September, the rise in consumer prices slowed more than expected, to 1.7% over one year, compared to 1.8% initially estimated by Eurostat.
The disinflation process is well underway, fueled by a sluggish economy.
– ECB press release
Core inflation, which excludes volatile energy and food prices, is also trending downward, at 2.7% year-on-year. Enough to reassure central bankers in their choice.
Supporting growth and investment
By reducing the cost of real estate loan and other loans, the ECB hopes to give a boost to household consumption and investments businesses. Essential drivers of economic growth.
This measure comes at a time when negative signals are multiplying for the European economy:
- Germany, the euro zone’s largest economy, expects a new recession in 2024 (-0.2% growth forecast)
- Private sector activity contracted in September for the first time in 7 months
- Household morale and business confidence remain degraded
In this gloomy context, the ECB had to act to avoid a lasting stagnation of the European economy. Even if this rate cut will probably not be the last. Most economists predict further easing in the coming months.
What are the risks for the future?
And at monetary policy The ECB’s accommodative policy may help revive the economy in the short term, but it also carries certain risks. The main thing being to see theinflation start to rise again if demand were to spiral out of control.
The sustainability of the fall in inflation in the euro zone is very uncertain.
– Éric Dor, Director of Economic Studies at IESEG
New external shocks, geopolitical or energy, could quickly cause prices to rise again. The ECB must therefore remain vigilant and ready to tighten monetary conditions if necessary.
The perverse effects of a policy of interest rate low levels in the long term, such as the misallocation of resources or the formation of speculative bubbles, should also be monitored. A delicate balance to find for the central bank.
What impact for your savings and loans?
If you have a real estate project in progress or in the future, this drop in key rates of the ECB is rather good news. The rates of real estate loans should automatically fall in the coming weeks, allowing you to borrow at a lower cost.
On the other hand, if you are a saver, this decision is not to your advantage. The return on your savings, already low, should further erode in this context of low rates. It may be wise to turn to more dynamic investments, depending on your profile.
Regardless, the ECB’s decision marks a turning point in its monetary policy. After years of massive support for the economy during the Covid crisis, the institution is beginning a very gradual return to normal. Proof that the situation remains fragile and uncertain in zone euro. A trend to watch closely in the coming months.
