The European Central Bank is preparing to cut interest rates. What impact will this decision have?

The so-called “official interest rates” are the interest rates that the European Central Bank charges banks for the loans it grants to them, or the rates it pays them for deposits that these banks hold with the European Central Bank.

“Under normal circumstances, The European Central Bank sets the level of official interest rates to influence various other interest rates in the economy. This is the main tool used by the European Central Bank to indirectly influence prices and keep inflation at 2% in the medium term, a rate it considers ideal for the economy, the Development Bank explains.

When the European Central Bank decides to increase official interest rates, banks in each country generally follow this decision And change the interest rates on the loans and deposits it offers to its customers.

“If interest rates fall, borrowing becomes cheaper and saving becomes less attractive. This encourages families and businesses to consume and invest more. As a result, the economy is stimulated and the prices of goods and services tend to rise further.”

How do interest rates affect us?
Changes in interest rates can have a significant impact on the lives of residents, both for those who have loans and for those who only have deposits.

The Office for Development Policy explains that these changes, even if small, can affect:

• Monthly fees for Home or car purchase loans;

• counts for Companies With the loan to invest in new equipment;

• The interest he received Savings application.

in Portugal, Many home loans have variable interest rates Which is linked to a reference index, such as Euribor. When the European Central Bank increases interest rates, the Eurobor tends to rise, which translates into higher monthly payments For those who choose a variable rate. The same thing happens in reverse, as these rates tend to fall when the European Central Bank cuts interest rates.

In the case of fixed rates, banks can only change them to obtain new loans. This means that when predicting a change in ECB interest rates, these banks can increase or decrease them.

Why should the ECB cut interest rates now?
To achieve its 2% inflation target, the ECB must “assess how much households and businesses plan to consume and invest, given the current and expected level of interest rates,” the development bank says.

“If it is necessary to encourage consumption and investment so that inflation rises, the European Central Bank usually lowers interest rates. Conversely, if it is necessary to reduce inflation, the ECB usually raises interest rates.

Over the past two years, central banks around the world Increase interest rates significantly to contain inflation Which emerged in the wake of the Covid-19 pandemic and the Russian invasion of Ukraine.

During this period, they sought to keep interest rates high long enough to ensure that inflation was contained, while also dealing with the risks of recession caused by higher borrowing.

At the end of last year, inflation fell more than expected in the 20 EU countries that use the euro: The growth rate reached 2.6% in May of this year, while it reached 10.6% in October 2022..

This decline prompted analysts to predict that the European Central Bank will cut interest rates between March and September 2024.

Will prices continue to fall after June?
Analysts do not expect any further declines in the coming months. ECB ‘will be cautious and unlikely to cut interest rates (again) at July meeting’Riccardo Marcelli Fabiani, from the University of Oxford Economics, said, according to Lusa.

“The ECB should keep open the idea of ​​further easing, if the data allow, but it should also avoid talk of a new cut in September,” said Klaus Vestesen, of consultancy Pantheon Macroeconomics. Politician.

Barclays analysts are currently expecting a quarterly cut. “We also expect the Board to reaffirm that it will continue to take a data-driven, meeting-by-meeting approach. Without previously committing to a specific modified pathsaid economist Mariano Sena.

For Joachim Nagel, head of the Bundesbank, a second successive rate cut in July is “not at all certain” because “we are not on autopilot”.

Frank Dexmeyer of Allianz Global Investors thinks so, too “Although there is consensus on this first cut, the pace of future cuts depends on a lively debate within the council.”.

To fuel this discussion, the ECB will have to turn to the new economic forecasts that emerge.