Interest rate cuts: Effects on mortgages, consumption and savings

The European Central Bank (ECB) has announced a 25 basis point cut in interest rates, the first since March 2016, ending a run of 10 consecutive rate hikes and bringing the base rate to 4.25 %. This has an immediate impact on mortgages, consumption and savings.

Background to the interest rate cut

The ECB's decision comes amid a downward trend in inflation in the eurozone. Several leading figures at the ECB, including Vice President Luis de Guindos and Chief Economist Philip Lane, had announced this measure in advance. According to Christine Lagarde, President of the ECB, the current inflation rate of 2.6 % justifies this move.

The interest rate cuts have the following effects:

Effects on mortgages

• Variable rate mortgages: Mortgages that are linked to the 12-month Euribor will be slightly relieved. The Euribor fell to 3.68 % in May and thus remains at its lowest level since December. This results in an average monthly saving of around 20 euros for mortgage holders.

Effects on new financing

• Credits: Interest rates for new loans, both for consumption and for house purchases, will fall slightly. This could make borrowing more attractive and boost consumption.

Effects on savings

• Financial products: The profitability of savings products such as deposits and accounts is likely to fall. Investors must be prepared for lower returns.

Effects on the property market

• Incentives to buy: Lower interest rates could stimulate the property market as mortgages become cheaper and more people are therefore able to buy property.

Outlook for further interest rate cuts

The ECB plans to keep monetary policy restrictive for the time being and does not expect any further major interest rate cuts before 2025. However, the market expects up to two further cuts in the second half of 2024 if the disinflation process continues.

Conclusion

The ECB's decision to cut interest rates is a step towards adapting to the current economic situation. While the immediate impact on mortgages and loans is limited, future rate cuts could have a greater impact. The balance between encouraging consumption and ensuring stable returns for savers remains a challenge.

Conclusion

The ECB's interest rate cuts have a variety of effects:

• Variable mortgagesSlight relief for borrowers.
• New financingPotentially more attractive credit conditions.
• SavingsLower profitability of savings products.
• Property marketPossible revival through more favourable mortgages.
• Future prospectsFurther interest rate cuts possible, depending on inflation trends.

Source - Idealista