ECB Cuts Interest Rates for the First Time in 5 Years — Why and Implications

The European Central Bank (ECB) cut interest rates for the first time since 2019. This move, unprecedented in the last five years, stands out not only because of its early timing in relation to the US Federal Reserve's decisions, but also because it comes at a time when the Eurozone is not facing a recessionary crisis. This action suggests a new proactive and cautious phase in the ECB's monetary policy.

Reasons for the ECB interest rate cut

So why has the ECB decided to cut interest rates? After a cycle of successive increases, reaching a total of 450 basis points in just over a year, the deposit rate has stabilised at 4% since September 2023.

However, this decrease will always be influenced by inflation above the target (2%) and rising wages, and the ECB is taking a cautious approach.

ECB interest rate cut — the details of the decision

The ECB announced its interest rate cut cycle, with a 25 basis point cut in the deposit rate to 3.75 per cent, with equivalent cuts in the other main rates.

Economists point to the high probability of one cut per quarter, based on Reuters and Bloomberg polls, which are in line with the ECB's economic projections. The next cuts will normally take place in September and December.

According to experts, ECB President Christine Lagarde will choose to present a cautious speech, without taking her feet off the ground. This choice is in line with all the uncertainty surrounding the current context of the Eurozone and the state of the European Union.

On the one hand, Bas van Geffen, an analyst at RaboResearch, suggests that there may not be any more cuts after the one that has just taken place this June. On the other hand, economists are divided between those who think there will be aggressive cuts and those who think it will be a slow pace and naturally dependent on how the economic data and inflation rates evolve.

Interest rate cuts — expected impact on consumers and businesses

The reduction in interest rates directly influences consumers' financing capacity. With lower rates, the costs associated with loans to buy housing and other consumer goods decrease, which can encourage an increase in the consumption of these products.

In addition, the ECB's interest rate cut could improve consumers' ability to pay, increasing their available liquidity, which could also stimulate consumption in other sectors of the economy.

This cycle could lead to a generalised increase in economic activity and contribute to a more robust economic recovery.

For companies, the cut in interest rates may represent an opportunity to refinance existing debts at lower costs, as well as facilitating access to new financing for investments.

With regard to companies in need of major investment, such as those in the construction and manufacturing sectors, they can particularly benefit from these conditions in order to expand their operations or modernise equipment and infrastructure.

In addition, lower financing costs can also encourage companies to explore new markets or innovations, strengthening their competitive position both domestically and internationally.

The challenges facing the ECB in this political scenario

In this context of monetary policy, the ECB faces significant challenges. Inflation is the data that will establish much of what can be done in terms of measures applied by the European Central Bank. A high inflation rate can mitigate the positive effects of interest rate cuts by increasing the cost of living and reducing purchasing power.

Added to the uncertainty of inflation are the unstable geopolitical environment and possible external economic shocks, such as changes in the price of raw materials or disruptions in supply chains.

For all these reasons, it is advisable and quite likely that the ECB will adopt a cautious stance. In this way, by applying measures in a flexible and adaptive way, it will be able to ensure stability and sustained economic growth in the Eurozone.

Low interest rates, high opportunities with MEXTO

The ECB's interest rate cut has opened up a window of opportunity for those wishing to buy a home. Taking advantage of the lower investment required as a result of this cut, those looking for more ambitious investments can search for properties in locations that would otherwise be inaccessible.

MEXTO has a portfolio of completed projects with apartments available, others in the final stages of construction, and some about to start work. Contact us and we'll give you all the information you need.