Despite rising inflation recently, the European Central Bank cut key interest rates for the fourth time this year on Thursday. The deposit interest rate, which sets the tone for monetary policy, is now three percent – that is 0.25 percentage points less than before.
In the past few months, inflation rates have risen slightly again in both Germany and the euro zone. The prices for services, for example in the health sector and catering, rose significantly in some cases, while energy prices fell. Inflation in the monetary union was 2.3 percent in November; in Germany the rate was 2.2 percent. Monetary authorities expect inflation to level off at two percent next year – that is the ECB’s target.
Key interest rates set the base price for interest income and the supply of credit. Banks usually adjust their loan interest rates immediately to the ECB’s decisions – so taking on debt for cars, travel and consumption is likely to become cheaper after the key interest rate cut. Things are a little different with mortgage loans. Normally, building financing interest rates are ahead of the key interest rate because real estate financiers lower their building financing interest rates in advance in anticipation of falling key interest rates. This is possible because the ECB usually indicates its interest rate steps at an early stage, and this also applied to the current decision.
According to data from FMH financial advice, 3.19 percent was recently due per year for building financing with a ten-year term. Last year, building interest rates were almost four percent. Meanwhile, savings interest rates continue to decline. At an average of 1.62 percent, interest rates for overnight money offers available nationwide have reached their lowest level in more than a year, according to data from the comparison portal Verivox. In a quarter of the approximately 800 banks and savings banks analyzed, overnight money is 0.25 percent or less. The downward trend has also continued for fixed-term deposits. Savings bond offers available nationwide with a two-year term currently yield an average of 2.34 percent. The last time interest rates on fixed-term deposits were lower was in February 2023. Verivox evaluated the interest offers as an example for an investment amount of 10,000 euros.
The weak economy is affecting the labor market
The ECB wants to stimulate the economy with its key interest rate cut. The EU Commission is forecasting meager growth of 0.8 percent for the euro zone this year. Germany could slide into recession for the second year in a row. The prospects for 2025 are also not good. The gross domestic product is likely to simply stagnate in 2025, predicts the Kiel Institute for the World Economy in its winter forecast published on Thursday. In September it had expected growth of 0.5 percent. For the coming year, experts are predicting a decline of 0.2 percent for Germany’s economy, which would be twice as large as previously assumed. In 2023, Europe’s largest economy even shrank by 0.3 percent.
The weak economy is now also having an impact on the labor market. Many German companies in the automotive and mechanical engineering industries are planning to lay off thousands of employees. However, the unemployment rate in Germany is still at a comparatively low level at just under six percent in November, and in the entire monetary union the unemployment rate is 6.3 percent, the lowest it has ever been in the history of the euro zone.
Many experts fear that US President-elect Donald Trump will provoke trade conflicts with the European Union and China. Trump has announced high tariffs on imports from Europe and China and has recently targeted Mexico and Canada. “With tariff increases, we are making consumption more expensive and fueling inflation,” said Bundesbank President Joachim Nagel, who fears that such a trade conflict could cost Germany one percent of economic output.
However, the high inflation phase in the euro zone is over for now. Inflation climbed to more than ten percent at times in 2022. The main cause was the production and delivery stops during the corona pandemic, and Russia’s subsequent invasion of Ukraine made energy and food more expensive. As a result, unions demanded high wage increases due to inflation, which the monetary authorities believed maintained price pressure.
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