When a drop in interest rates is recorded, it is positively valued whether the economic scenario is one of slowdown – they are reduced to encourage supply – or whether the economy is growing – the demand for goods and services is favored. Precisely, it was the inflation that emerged at the beginning of 2022 – due to the fact that supply chains had not fully recovered after the pandemic, to changes in energy prices, and due to the invasion of Ukraine – that forced the ECB to raise the rates. interest rates gradually from 0.0% to 4.5%; and it is at this moment, since eurozone inflation began to fall below 4% in October 2023, now at 2.6%, that the ECB has been inclined to apply this modest reduction in its interest rates. reference.
Could they have been lowered further given the level they have reached and “controlled” inflation? Perhaps, however, we cannot forget two important factors: on the one hand, inflation has not yet reached 2.0% – which is what corresponds to the ECB's mandate – and in fact in May it suffered a increase – from 2.4% in April it went to 2.6% – and on the other hand, the ECB has gone ahead of the Federal Reserve to initiate interest rate cuts, contrary to what happened in the past with the climbs.
Who benefits from a reduction in interest rates? Undoubtedly to a broad spectrum of society, firstly because in terms of the real economy, the price of inputs are rising at moderate rates, which has already been perceived in recent months – however, the “step” effect , although we managed to raise some of 10%, as happened at the end of 2022, while now, although we continue to rise, the steps are lower, that is, around 2.5% -, and secondly, since From the perspective of the financial economy, the first beneficiaries are the most indebted sectors – public administrations, companies, and families, especially the youngest ones -, especially if their loans were linked to a variable interest rate.
Additionally, companies can unlock investment decisions by knowing that the cost of financing them decreases. And even savers can take advantage of the drop in interest rates, in cases where they own variable income – for example, company shares via investment funds or pension plans – because now the denominator to which flows are deflated of cash is lower, and consequently the value rises -, or even some fixed income assets as long as it is not a bank deposit at a variable rate. On the losing side, in addition to a part of the savers (depositors), we can find the importers, as a consequence of the fact that a reduction in interest rates normally produces a devaluation of the currency, which is more likely if the other currency does not lower its prices simultaneously, as would be happening now with the ECB having moved ahead of the Federal Reserve.
Is this reduction in the price of money going to be perceived significantly? In my modest opinion, quite little, not so much because it was minimal, but because economic agents were expecting (“discounting”) that interest rates would have to be redirected in parallel with inflation, and since they are obliged to estimate what is going to happen In the future, these forecasts will be reflected in their operations. As a result, we have seen a drop in the Euribor from an average of 4.0% in November 2023 to 3.7% in recent weeks; that is, 30 basis points compared to the 25 basis points of the ECB interest rate.
What can we expect? As long as the international context is neutral, and therefore does not raise suspicions of an increase in raw material prices, inflation will approach 2.0%, which would allow the ECB to confirm the path of cuts, in the interest rate. reference interest, once again this year (September), or even two.