Interest rates rising since 2022
A lot has changed since then: interest rates are rising again. If you have money in savings, you have probably heard from your bank that you are once again earning interest. Earning interest on savings is great, of course, but people looking to take out a new mortgage on a house will also notice that interest rates are a lot higher than in 2021. Higher interest rates make mortgages more expensive.
They also affect businesses, which have to spend more money to take out a loan. The government also faces higher interest charges on its loans. Pension funds, on the other hand, benefit from higher interest rates, which make it easier for them to continue paying pension benefits in the future.
That upswing in interest rates is again due both to the situation in financial markets and, above all, central bank policies.
ECB lowered interest rate
In June, September and October 2024, the ECB decided to lower its interest rate by 0.25%. Previously, the central bank had raised its rate to 4% in 10 steps, starting in July 2022. The aim was to cool the economy in order to bring down the soaring inflation rate. Prices had skyrocketed in the wake of the pandemic and the Russian invasion of Ukraine, and inflation was far above the ECB’s medium-term target of 2%. With this rate cut, the ECB is gently taking its foot off the brake, which will help boost economic growth.
Higher interest rates make money “more expensive”, making it less attractive to borrow and spend money, and encouraging saving instead. As a result, people and businesses spend less, causing the economy to slow down. And when demand slumps, prices stop rising. That way, the interest rate helps get inflation back to ideal levels. With inflation falling and expected to return to the 2% target soon, the ECB may decide to lower its interest rate again. Interest rate cuts do not have an immediate effect on prices and inflation, however. This takes some time.
Loan supply and demand and savings in financial markets also affect interest rates, and meanwhile the market is trying to predict economic growth and inflation, especially when it comes to long-term loans. What interest rate steps will central banks take next?
As soon as there is reason to readjust the key policy rate, the ECB will do so. Because as the central bank for the euro area, its mission is to keep prices stable.