In a year and a half, the ECB interest rate rose from the lowest to the highest level ever. Now that inflation is falling rapidly and high interest rates are economically painful, we have to wait for interest rate cuts in 2024. Whether mortgage and savings rates will fall along with it remains to be seen.
In brief
- The ECB interest rate rose from the lowest to the highest level ever in a year and a half.
- High interest rates limit inflation, but also economic growth.
- That is why a first interest rate cut since 2019 is expected in 2024. But the ECB is in no hurry.
The ECB (European Central Bank) interest rate is an instrument to curb inflation in Europe. By raising interest rates and making borrowing unattractive, the central bank can lower inflation to around 2 percent. This is gradually working, because inflation in the euro area already fell to 2.4 percent in November.
The ECB kept interest rates the same at the interest rate meetings at the end of October and mid-December. Meanwhile, calls for the first interest rate cut since 2019 are becoming louder among economists and investors.
The high ECB interest rate (4 percent) is starting to hurt. Because borrowing is unattractive, companies invest less. Ultimately, this also affects economic growth. The Dutch economy has been shrinking for three quarters in a row. In two quarters there is a recession. Germany’s economy and that of the eurozone as a whole also contracted in the third quarter of 2023.
Unfortunately, this content cannot be displayed. We do not have permission for the necessary cookies. Please accept cookies to view this content.
Change cookie settings
Recession, but no major problems yet
“The Dutch economy has shrunk for a few quarters, but it does not really feel like a recession,” says ING economist Bert Colijn. “We see that the economic contraction has not directly led to a sharp increase in the number of layoffs or bankruptcies. But “In the absence of investment, that may happen. As the ECB, you do not want to hurt the economy more than necessary to slow down inflation.” So it is time for an interest rate cut.
The difficult thing for the ECB is the timing: interest rate interventions only have an effect late. That can easily take 9 to 24 months, says Colijn. He thinks that last year’s increases will have an even greater impact in 2024 than in 2023. “Companies’ investments are increasingly being slowed down and a larger share of loans are being taken out at higher interest rates.”
ECB cautious about interest rate cuts
According to Colijn, central bankers at the ECB remain cautious in their words about possible interest rate cuts. “Because wage increases via collective labor agreements often follow inflation later, they expect that wages for many Europeans will continue to grow significantly in 2024. If people then have more money to spend, this may keep inflation high for longer.”
Suppose they lower interest rates too quickly and inflation rises again, that could lead to problems, the economist says. “Then interest rates suddenly have to be raised much further, just like in the 1970s,” says the ING economist. “Due to the slow impact, zigzagging is useless. That is why there are often several reductions in succession.”
Investors are betting that the ECB interest rate will be lowered for the first time in March. But Colijn, like colleagues at ABN AMRO, thinks it will be more likely June 2024. He expects that the central bank wants more certainty that inflation is really under control and wage increases are lower than the current 4 to 5 percent.
Interest rates are already falling on mortgages
The question is whether consumers will notice this quickly. The ECB interest rate ultimately affects the rates that banks charge for loans and savings products. Can we expect interest rate cuts there again? According to Colijn, this also depends on how interest rates on government bonds develop for mortgage rates.
These mortgage interest rates are more strongly influenced by falling interest rates for investment products on the financial markets. Mortgage interest rates have been falling for almost two months. It is now possible to fix your mortgage interest rate for ten years for less than 4 percent, half a percentage point less than in October.
Savings interest rates are still rising
Over the past year, savings interest rates at banks also rose slowly but surely, but less quickly than the ECB interest rate and also less quickly than the interest rates on loans and mortgages. Banks themselves previously confirmed that the higher ECB interest rate will have a slower impact on savings rates and preached patience.
The difference here is that the interest on a mortgage often only applies to new customers, while savings interest rates apply to all account holders. And that savings rates do not have a long fixed interest period, because you can access your money immediately. The last increase in savings interest rates at major banks was back in October.
2024-01-01 03:57:52
#Interest #rates #fall #question #Economy
