Against the backdrop of declining inflation in the eurozone, the European Central Bank (ECB) will decide on key interest rates this Thursday. The decision will be announced at 2:15 p.m. The financial markets are firmly expecting an interest rate cut.
The current benchmark deposit rate that banks receive for money parked at the ECB is 3.75 percent. Financial experts agree that it will fall by 0.25 percentage points.
The interest rate at which banks can obtain fresh money from the central bank – previously known as the main key interest rate – is 4.25 percent. Since the ECB decided in March to reduce the difference between the two interest rates to 0.15 percent from September 18, a greater reduction is expected here.
The central bank is also presenting new forecasts on inflation and economic growth in the eurozone. These could provide clues to future monetary policy.
Successes and risks in combating inflation
Falling inflation in the euro area gives monetary authorities scope for interest rate cuts. It is approaching the ECB’s medium-term target of two percent: In August, the inflation rate fell to 2.2 percent compared to the same period last year – the lowest level since summer 2021. Inflation in Germany also recently fell significantly to 1.9 percent.
The ECB initiated the interest rate turnaround in June and reduced the key interest rates by 0.25 percentage points for the first time since the wave of inflation. However, core inflation, which is closely monitored by economists and does not include volatile energy and food prices in the eurozone, is holding up well: it only fell slightly by 0.1 percentage points to 2.8 percent in August. The Bundesbank, for example, warns against loosening monetary policy too quickly.
The ECB has to manage a balancing act in its monetary policy. High interest rates make loans expensive. This can slow down the economy and dampen inflation. At the same time, expensive loans are a burden for companies and private individuals who borrow money. If the ECB lowers interest rates too quickly, it runs the risk of inflation rising again.
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