European Central Bank: final step?

Was that all, or is there more to come? The European Central Bank raised key interest rates again by 25 basis points on Thursday last week. The ECB deposit rate, which is the interest rate banks receive on their excess funds if they store them overnight at the central bank, is now 4%, and the refinancing rate that banks apply to the ECB (for a fixed period ). .week) The ability to borrow funds has been increased to 4.5%.

“The European Central Bank decides to raise interest rates for the tenth time in a row” – this is what the media headlines said. These headlines are often combined with the phrase “interest rate peaks have been reached” or “interest rate hikes have come to an end.” This development, which was not positive for many borrowers, at least increased the return potential for security-oriented investors, after years of no interest on their cash accounts. But was this really the final step?

Peak transformations

The need for these interest rate increases arose from inflation rates across the euro area, which were well above 2%, and in some countries even exceeding 10%. Because of this development in inflation, which was initially seen as temporary, the ECB began a cycle of interest rate increases in order to initially halt the rise in inflation rates and even reduce them slightly. However, inflation rates in the entire euro area are still well above 2%. Even if they fall, for us it means: “higher interest rates for a longer period of time.” While at the beginning of 2023 it was expected that interest rates would peak in September 2023 and interest rates were already expected to fall slightly by the end of the year, the situation now looks very different. On the one hand, we are well above expectations, and on the other hand, the peak in interest rates is expected not to be reached until the end of the year, without pricing in a major rate cut in the first half of 2024. In. However, capital markets are currently pricing in the first rate cut in July 2024. However, given inflation rates, this seems overly optimistic.

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