Kazakh: Euribor rate decreased by 1.15%

Interest rates are still very high and hinder economic growth, writes Mārtiņš Kazāks, president of the Bank of Latvia, on the website “Makrokenomika.lv”.

On Thursday, October 17, the Council of the European Central Bank (ECB) decided to reduce interest rates by 0.25 percentage points. Kazak reminds that from June 2024, this will be the third rate reduction in total, now by 0.75 percentage points, reducing the policy rate of the ECB (overnight deposit facility) to 3.25%.

Kazak reports that the six-month EURIBOR rate has fallen to 3%, while a year ago it was around 4.15%.

The president of the Bank of Latvia explains that the servicing of existing loans is becoming easier, by providing new loans cheaper. Inflation rates continue to decline while the economy remains weak and rapid economic growth is still not in sight, weakening upward pressure on prices.

These two factors – a decline in inflation and a weak economy – make it possible to continue reducing interest rates step by step, says the President of the Bank of Latvia.

It states that inflation rates in the Eurozone decreased to 1.7% in September (2.2% in August and 4.3% a year ago), where lower energy prices contributed the most. Although a fall in inflation rates was expected, it fell faster than expected, Kazaks says. In Latvia, inflation was 1.6% in September (0.9% in August) and has been below 2% this year. At the same time, the average wage growth rate has been faster than inflation for a long time, so people’s wallets are gradually getting more money and their purchasing power is improving.

He also notes that the weakness in the economy has increased and that growth in the euro area as a whole is still just slightly above zero.

The head of the Central Bank explains that the latest purchasing managers’ sentiment data (“purchasing managers’ index“) shows a deterioration in the sentiment of companies in the manufacturing industry and the service sector. Although families are still very cautious – consumption is relatively weak and the desire to save is strong – little by little the mood is starting to improve.

According to Kazāk, this can also be seen in the loan data, where the lowest point is behind us not only in Latvia, but perhaps now also in the euro area as a whole – yes the latest bank survey data indicates that domestic demand for loans has increased.

“Bank credit standards are also becoming less stringent. This is good news, as household consumption has so far been weaker than expected and has been one of the main reasons that delayed economic recovery,” Kazaks said.

He admits that risks to growth remain on the downside. If the recovery is delayed, Kazaks warns, that could lead to layoffs, putting the risk of inflation being pushed well below the target level. At the same time, Kazak points out that this is a risk scenario, not a default scenario – the default scenario remains a “soft landing” without a rapid increase in unemployment and recession.

Although inflation fell below the 2% target level in September, the ECB’s forecasts show that inflation will rise above 2% again in the euro area in the coming months as a result on basic effects, Kazaks explains. If inflation was lower than expected in previous months, it will be important to see if it will be significantly lower than expected in the following months as well, Kazak says, indicating that if so, the target there is 2% inflation. they may be reached earlier than the end of next year.

However, the President of the Bank of Latvia emphasizes that uncertainty is high, for example the upcoming presidential elections in the USA, the ongoing Russian attack on Ukraine and the conflict in the Middle East, as that, as before, the decisions of the ECB Council are made at each meeting, carefully analyzing and evaluating the dynamics of inflation to date, both its future forecasts and the impact of monetary policy.

For the next ECB Council meeting in December, there will be updated forecasts, as well as a series of new economic data, explained Kazaks. He confirms that with the reduction of inflation and a steady return to the 2% target, rates will continue to decrease.

Kazak also says that lower rates will help people’s incomes and the economy to grow.

“However, lower interest rates are not a magic wand for sustainable and rapid economic growth. Lower interest rates can help, but they do not ensure an increase in the income of the population. To grow the economy, productivity growth is important, but it is determined by the structure of the economy, that is, without structural reforms that improve productivity, it is impossible to sustainably improve incomes and quality of life,” Kazaks writes.

LETA already announced that the ECB has decided to lower interest rates by 0.25 percentage points from October 23. The overnight deposit rate will be reduced to 3.25%. The main rate of refinancing operations was lowered to 3.4%, and the rate of overnight loans – to 3.65%.