Decision taken European Central Bank lowers key interest rate

The ECB is lowering the key interest rate in the eurozone. This was announced on Thursday.

The European Central Bank (ECB) is reacting to the slowdown in inflation in the eurozone. The deposit rate, which sets the trend on the financial market and which banks receive when they park surplus money with the central bank, will fall by 0.25 percentage points to 3.5 percent. This was announced by the central bank in Frankfurt.

The latest inflation data were in line with expectations. The ECB is thus moving forward with the interest rate turnaround it began in June. The monetary authorities hope that lowering interest rates will provide positive impetus for growth. Companies and private households can invest and consume more easily with cheaper loans. Conversely, savers will have to adjust to falling interest rates at their bank and lower returns on life insurance policies, for example.

The ECB is also implementing a technical innovation: It is bringing the deposit rate closer to the interest rate at which banks can obtain fresh money from the central bank ("main refinancing rate"). This was previously known as the most important key interest rate.

In March, the central bank decided to limit the gap between the two interest rates from 0.5 to 0.15 percentage points from September 18. The main refinancing rate will therefore fall even further by 0.6 percentage points to 3.65 percent, as the ECB also announced.

The narrower interest rate corridor is intended to reduce fluctuations in short-term interest rates and create more predictability for banks. The move is unlikely to have any impact on private customers, as banks are already guided by the deposit rate.

Success in the fight against inflation

Economists had expected the ECB's decision, as inflation in the eurozone had recently approached the ECB's medium-term target of two percent: In August, the inflation rate fell to 2.2 percent year-on-year - the lowest level since summer 2021. In Germany, inflation fell particularly sharply to 1.9 percent. The ECB initiated a turnaround in interest rates in June and lowered its key interest rates for the first time since the wave of inflation.

Previously, the central bank had raised interest rates ten times in a row in order to get a grip on the soaring inflation following the Russian attack on Ukraine. Inflation in the eurozone peaked at more than ten percent in October 2022.

Warnings against easing too quickly

However, core inflation, which receives a lot of attention from economists and excludes volatile energy and food prices, is holding up well: it only fell by 0.1 percentage points to 2.8% in August. The Bundesbank, for example, is warning against easing the ECB's monetary policy too quickly. "We have not yet reached our goal," warned President Joachim Nagel recently.

The ECB considers price stability to be maintained at an inflation rate of two percent in the eurozone. Higher inflation reduces the purchasing power of consumers. At the same time, the central bank wants to avoid lower rates or even falling consumer prices (deflation): They carry the risk that companies and consumers alike will postpone purchases as they expect even lower prices.