Bank dances an interest dance with regular breaks

For the second time this year, the European Central Bank (ECB) decided to lower its interest rates. The main interest rate is now 3,5%. What will this ultimately lead to in the interest rate trend in the coming months?

The ECB decided to make the second rate cut this year, as inflation has fallen further (to 2,2% in August). In addition, the bank has become more confident that currency devaluation will fall to the target rate of 2025% by 2. In addition, concerns about economic development in the coming quarters have increased, partly because the German economy cannot seem to find its way. The German economy accounts for about a quarter of the total economy of the eurozone. In some other countries, including Italy, the third largest economy in the monetary union, the economic cogs are also not turning smoothly.

Walking different paths
The ECB's course for the coming period is less clear than the course of the American central bank Fed in the US. That bank is preparing to start a series of interest rate cuts. Incidentally, it should come as no surprise that the two sister institutions are following different paths. 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 such an extent that fears of a recession have arisen.

Inflation in the US seems more under control than in the eurozone, perhaps because the Fed took action against high inflation earlier than the ECB and in that fight had raised interest rates considerably more than the ECB. These things now mean that the Fed has considerably more room to make borrowing money cheaper than its European sister institution. On the financial markets, investors expect the Fed to cut interest rates by a full percentage point between now and the holidays, followed by a series of rate cuts in 2025.

Fewer steps down
For the ECB, she sees considerably fewer steps down in the interest rate sphere. The ECB's interest rate cut yesterday comes after the bank left the lending rates unchanged last time. The next interest rate meeting will follow fairly quickly, namely in just over a month from now. Because the ECB does not receive a great deal of new information about the ins and outs of the economy of the monetary union, it seems that the bank is currently dancing a kind of interest rate dance, in which it pauses after each interest rate cut. This means that the interest rate will be lowered again this year in December.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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