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ECB Lowers Interest Rates: What It Means for the European Economy

The European Central Bank (ECB) has recently announced a new 25 basis point cut to its interest rates, marking the second reduction after a period of significant hikes aimed at controlling inflation. This decision signals a gradual shift in European monetary policy, with direct impacts on the economy and, particularly, on housing loans.

The Impact of the Rate Cut

The ECB’s main reference rate, the deposit rate, has been adjusted to 3.5%. However, the most significant reduction affects the refinancing rate, which has dropped from 4.25% to 3.65%. This move is especially important for those with mortgage loans, as the refinancing rate directly influences the interest charged on loans, potentially providing financial relief for many households and businesses across the Eurozone.

This adjustment aims to bring the various ECB rates closer together and to provide more balance within the European financial system, while still maintaining the focus on combating inflation.

A New Step After Rate Hikes

Since July 2022, the ECB has pursued a policy of raising interest rates to combat surging inflation, driven by factors such as the energy crisis and geopolitical tensions. However, in June 2024, the central bank made its first rate reduction, signalling that the worst of inflationary pressures may have passed.

Now, with this second cut, the ECB appears to be fine-tuning its strategy to avoid a sharp economic slowdown. Christine Lagarde, the ECB President, reaffirmed that the long-term goal remains to bring inflation back down to 2%, a level considered healthy for the European economy.

Future Decisions: A Non-Predetermined Path

Despite the latest cut, Lagarde emphasised that the ECB is not committed to a fixed trajectory of rate reductions. She reiterated that future decisions will be based on available data and a thorough analysis of multiple economic indicators, without relying solely on inflation figures.

This means that the ECB will continue to act cautiously, assessing the broader macroeconomic landscape. As Lagarde pointed out, uncertainty remains high, making it difficult to predict the pace and magnitude of upcoming decisions.

What to Expect?

The next ECB meeting is scheduled for the end of September, with two more planned before the end of the year. While the recent cuts offer some relief, the future path of interest rates will depend on the economic performance of the Eurozone in the coming months. Falling inflation is a positive sign, but other factors, such as economic growth and employment, will also play a crucial role in shaping future decisions.

For those with loans or investments linked to ECB rates, this is a time to closely monitor the development of monetary policy. The ECB remains focused on economic stability, seeking to balance inflation and growth in a sustainable way, but without committing to specific cuts or increases in the future.

The interest rate cut reflects a measured response by the ECB to current economic conditions, while also reinforcing the uncertainty ahead. With inflation easing and the economy stabilising, the central bank is keeping a flexible stance, deciding step by step the best course of action to achieve its goals.

For now, the only certainty is that the ECB will continue to pay close attention to the data and stand ready to act as necessary to ensure economic stability and support a healthy recovery for the Eurozone.