For the second time this year, the European Central Bank (ECB) decided to lower its interest rates. The main interest rate is now at 3.5%. Where will this ultimately lead in the interest rate trend in the coming months?
The ECB decided to proceed with the second interest rate cut this year because inflation has further decreased (to 2.2% in August). In addition, the bank has gained more confidence that the money devaluation will drop to the target rate of 2% by 2025. Furthermore, concerns about the economic development in the coming quarters have increased, partly because the German economy is struggling to find its footing. The German economy accounts for about a quarter of the total eurozone economy. Also, in some other countries, including Italy, the third largest economy in the monetary union, the economic gears are not running smoothly.
Taking different paths
The course of the ECB for the coming period is less clear than that of the American central bank, the Fed, in the US. That the two sister institutions are taking different paths should not surprise anyone. The economic situation on the other side of the ocean is different from that in the eurozone. In the US, the economic engines are slowing down to the extent that there are fears of a recession.
Inflation in the US seems to be more under control than in the eurozone, perhaps because the Fed acted against high inflation earlier than the ECB and in that fight, raised interest rates significantly higher than the ECB. These factors now allow the Fed to make borrowing significantly cheaper than its European sister institution. In the financial markets, investors expect the Fed to lower interest rates by a full percentage point between now and the holidays, followed by a series of rate cuts in 2025.
Fewer steps downward
For the ECB, it sees significantly fewer steps downward in the interest rate sphere. The ECB's interest rate cut yesterday came after the bank left the lending rates unchanged last time. The next interest rate meeting is coming up fairly quickly, in just over a month from now. Because the ECB does not receive much new information about the economy of the monetary union, it seems that the bank is currently engaged in a kind of interest rate dance where it pauses after each rate cut. This means that the interest rate will go down again this year in December.
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