The European Central Bank persists in reducing its interest rates.
The ECB is worried about the declining economy within the Eurozone, leading it to carry out its fourth round of interest rate reductions this year. Experts predict that the bank might lower interest rates even further in the upcoming year. Potential trade disagreements, such as those with the United States and its re-elected President Donald Trump, could put further strain on the lagging economy in Europe.
For now, the ECB council decreases the primary interest rate in the financial market by 0.25 percentage points, setting it at 3.0%. This rate is what banks receive for depositing funds with the central bank. As a result, savers might notice the impact of this cut, as many institutions often pass on reduced deposit rates to their account holders by offering lower interest rates on savings accounts.
Moreover, the interest rate at which banks can acquire fresh funds from the ECB is also reduced by 0.25 percentage points, from 3.4% to 3.15%. Lower interest rates typically have a positive impact on the economy by making loans more affordable, enabling businesses and private individuals, such as homeowners, to secure financing for investments at better terms, thereby boosting economic growth.
Promoting growth
Economists anticipated the recent interest rate reduction, with some speculating about a possible 0.5 percentage point reduction. With the end of the significant inflation surge in the Eurozone, the ECB now has more room for maneuver.
The ECB is also concerned about the weak economic outlook in the Eurozone, as recently indicated by President Christine Lagarde's warnings of persistent economic weakness. France and Germany, the region's main powers, are currently grappling with government crises, making them less capable of driving reforms in challenging global conditions.
Although the annual inflation rate has started to rise again in Germany and the Eurozone as a whole, experts do not expect another significant inflation surge like the one that followed the start of the Russian invasion of Ukraine in February 2022, when energy and food prices skyrocketed.
The inflation rate in the currency area is now significantly lower than its record high of 10.7% in the fall of 2022, due in part to the ECB's most significant interest rate hike in 25 years. The ECB ended its long-standing policy of zero and negative interest rates in July 2022 and raised interest rates ten times consecutively. Higher interest rates make loans more expensive, which can reduce demand and combat high inflation rates. However, in June 2024, the ECB reduced interest rates for the first time.
The central bank aims to keep an annual inflation rate of 2.0% in the Eurozone, ensuring it remains a reasonable distance from the zero threshold. Persistently low prices can pose a risk to the economy, delaying investments due to expectations of lower future prices. Conversely, if prices rise too rapidly, it can be harmful to the economy, as consumers lose purchasing power, impacting their consumption, which is a significant driver of economic growth.
Trade disputes, as pointed out by leading central bankers, may pose an additional threat to the already struggling economy in the Eurozone. The re-elected US President Trump has announced steep tariffs on European imports. In response, the European Union might impose countermeasures. Germany, as a major exporting nation, would likely be severely affected by such a trade conflict.
The ECB's concern about potential trade disputes, such as those with the United States, stems from the re-elected President Donald Trump's announcement of steep tariffs on European imports. This could put additional strain on the lagging economy in Europe, especially for major exporting nations like Germany.
As a result of the ECB's conviction in the necessity for growth promotion, the recent interest rate reduction is aimed at making loans more affordable, enabling businesses and individuals to secure financing at better terms, thereby boosting economic growth.
