EU key interest rate remains at 4.5 percent: What does the interest break mean for savers, investors or property buyers?

First interest break since July 2022

In general, key interest rates are an important monetary policy instrument of a central bank. This is because commercial banks borrow money from central banks such as the ECB in order to lend it to companies and households. When the central bank lowers its key interest rates, it becomes cheaper to borrow money. Investments are then more likely to pay off for companies and households can expand their consumption so that economic growth ultimately picks up. Accordingly, a central bank lowers key interest rates during an economic downturn or during a recession.

‍

This was also the case after the financial crisis in 2008, when central banks around the world gradually reduced interest rates. In the euro area, zero interest rates were even the reality from 2016. This marked the beginning of lean times for savers. However, for home builders, companies and all market participants who benefit from cheap loans, the following years were “a win.”

‍

But due to the corona pandemic and the war in Ukraine, the global economy stalled again and there is even a risk of recession in some countries. From July 2022, central banks reacted to this again with very significant and rapid interest rate hikes. Because it was the flaring, high IInflation rate of 11.5 percent at a peak (EU, October 2022) to combat with monetary policy measures.

‍

After the inflation rate fell significantly to 4.3 percent in September 2023, the discussion about the central bank's further share price has flared up. Inflation is still more than twice as high as the target two percent and remains very stubborn in many areas. However, the majority of the Governing Council saw no further need for action and called for a break in the interest rate cycle. This is because higher interest rates are considered a means of countering inflation, as they dampen demand and thus also price inflation. At the same time, however, rising interest rates may hamper economic growth. For example, there is currently a significant decline in credit demand from households and companies. For example, with real estate loans. Due to economic and global political concerns, decided At its most recent October meeting, the ECB will no longer touch the key interest rate of 4.5 percent (at least for now).

‍

What do high interest rates mean for us?

In fact, the current interest rate level is about as high as it was at the beginning of the 2000s. This has far-reaching consequences for all market participants:

‍

• economy

The economy in the euro area, which was clouded by rising interest rates and, as a result, higher borrowing costs, is also likely to have played an important role in the ECB's decision. For example, the Purchasing Managers' Index Despite a slight increase, it is still not at an acceptable level. It stood at 39.6 points in October 2023, but only after 50 points does the economic barometer signal growth, including a contraction.

‍

• saver

Although interest rates remain at current levels, there is good news for savers: For the first time, some banks are offering interest rates that compensate for the inflation rate. Some providers pay for Fixed-term deposits with a term of one year interest of 4.75 percent, as shown by an evaluation by the Verivox comparison portal. Interest rates are therefore above the inflation rate of 4.5 percent in September.

‍

• property owner

The years 2016 to 2022 were almost paradise for anyone who wanted to buy or renovate a property. Zero interest rates also made it possible for people with lower incomes or savings to fulfill their dream of owning their own home. This is because the monthly interest burden on the household budget was negligible. However, since many have taken out a loan with a fixed interest rate of five or ten years, the current high interest rate level means that property owners face monthly costs that they had not calculated - and may not be able to bear. However, selling the property is often not an option. On the one hand, because before the ten-year period, there is usually a Speculative tax accrues. On the other hand, because the real estate market in many parts of Europe has collapsed in recent months.

‍

• stockholders

The interest break tends to be good news for share owners, as even higher interest rates would prompt shareholders to shift their money more into interest-bearing forms of investment. But even at the current interest rate level, fixed-term deposits etc. are attractive options. In addition, the situation on the stock markets is extremely tense and too risky for many investors.

‍

• Real asset investors

Real assets investments On the other hand, such as gold, diamonds, art or fine wine, for example, are relatively “immune” to market turbulence. In fact, they can even act as a deposit hedge, especially in uncertain times, as the development of gold prices shows: In October 2023, the Gold price in euros It has almost risen to a record high.

‍

What's next for interest rates?

Despite the recent interest rate break, it is not yet a foregone conclusion for Bundesbank President Joachim Nagel that the interest rate cycle has reached its peak. Inflation could also pick up again quickly. He does not want to rule out a further interest rate hike over the course of the year, i.e. at the December meeting of the Governing Council of the ECB. ECB President Christine Lagarde also has an ambitious goal in mind: “We want inflation to fall to two percent and we will achieve that,” she promises again and again. But many experts no longer believe that this is feasible. On the one hand, global political conflicts and wars weigh on the economy. On the other hand, there are structural changes over which the ECB has no influence. For example, increasing spending on climate protection, higher wages, production costs and intensified competition — for example in the e-car sector. For investors, this means that anyone who wants to invest money successfully should remain flexible and be able to react to market changes. It is also advisable to diversify the portfolio in order to minimize cluster risks.

‍