Recovery in interest rates is approaching, but…: ECB left key interest rates in the euro zone unchanged

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Euro currency watchers are staying the course for now. However, as inflation continues to fall, calls for interest rate cuts will not disappear.

There is still a long time left for the interest rate reduction that the economy in the Eurozone has been longing for. The basic interest rate at which banks in the Eurozone can obtain fresh money from the European Central Bank (ECB) remains unchanged at 4.5 percent for now. The Central Bank Council decided this in Frankfurt on Thursday. The deposit interest that banks receive for parked funds remains at 4.0 percent. This marks the fourth consecutive year that the ECB left key interest rates on the currencies of 20 countries unchanged.

High interest rates burden companies and private investors

The ECB ended the zero and negative interest rate years in July 2022 in order to temporarily control inflation, which reached record levels. The central bank increased interest rates ten times in a row. Therefore, making loans more costly could slow demand and offset higher inflation rates. But more expensive financing also creates a burden for companies and private investors. Calls are growing for interest rates to be lowered again in the face of a weakening economy.

In addition, the inflation rate in both the Eurozone and Europe’s largest economy, Germany, has been on a downward trend recently. Consumer prices in the euro area were 2.6 percent higher in February 2024 than in the previous year. According to preliminary data, annual inflation in Germany reached 2.5 percent in February, the lowest level since June 2021.

The first interest rate cut will probably come in 2024

Overall, price development is moving towards the ECB’s medium-term target of two percent. At this value, monetary authorities consider price stability to be guaranteed. High inflation rates reduce consumers’ purchasing power. You can then afford one euro less.

Economists expect the ECB to cut interest rates this year. However, monetary authorities do not want to give an exact date yet. In recent weeks, leading central bankers have warned against prematurely declaring victory over inflation. “Even if the temptation is great: it is too early to cut interest rates,” Bundesbank President Joachim Nagel said when he presented the Bundesbank balance sheet on February 23. Inflation is in decline, but the target has not been reached yet.

In her speech to the European Parliament at the beginning of last week, European Central Bank President Christine Lagarde reiterated her previous assessments that the decline in inflation rates will continue. However, Lagarde emphasized that in order to change course, the ECB Council must first make sure that the central bank’s inflation target will be achieved in the long term. (SDA/month)

Source :Blick