Home » Weak economy: That’s why the ECB isn’t lowering key interest rates (yet).

Weak economy: That’s why the ECB isn’t lowering key interest rates (yet).

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Weak economy: That’s why the ECB isn’t lowering key interest rates (yet).

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The European Central Bank is not reducing the key interest rate in the euro area and is leaving it unchanged for the fourth time in a row.

With inflation currently falling, prices are moving towards the ECB’s medium-term target of two percent.

Before the central bank starts cutting interest rates, it must first be certain that the inflation targets will actually be achieved, said ECB President Christine Lagarde.

The interest rate cut in the euro area that the economy has longed for is still a long time coming. For the time being, the key interest rate at which banks in the euro area can obtain fresh money from the European Central Bank (ECB) remains unchanged at 4.5 percent. The Central Bank Council decided this on Thursday in Frankfurt. The deposit interest that banks receive for parked funds remains 4.0 percent. This means that the ECB is leaving key interest rates in the 20-nation currency area unchanged for the fourth time in a row.

In July 2022, the ECB ended the years of zero and negative interest rates in order to get inflation, which had temporarily reached record levels, under control. The central bank raised interest rates ten times in a row. The fact that loans therefore cost more can slow down demand and counteract high inflation rates.

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However, more expensive financing is also a burden for companies and private investors. In view of the weakening economy, there are increasing calls to lower interest rates again.

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Inflation on the decline

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

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

ECB interest rate cut expected

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

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In a speech to the European Parliament at the beginning of last week, ECB President Christine Lagarde reiterated earlier assessments that the process of declining inflation rates is likely to continue. However, Lagarde emphasized that in order to change course, the ECB Council must first be confident that the central bank’s inflation target will be achieved in the long term.

dpa

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