The European Central Bank (ECB) decided on Thursday to lower the three key ECB interest rates by 0.25 basis points. This does not mean, however, that the Euribor rates, which normally apply to loans, will fall immediately.
Key takeaways:
- It is highly unlikely that Euribor rates will change significantly in the short term
- Banks will probably continue to cut interest rates on fixed-term deposits and savings accounts
- Financial market expects two more interest rate cuts this year
The financial markets live in the future, which means that market participants' expectations are priced into interest rates well in advance. This time, the ECB’s rate cut in June was already priced into Euribor rates, which means that the ECB's decision is unlikely to have a significant impact on current Euribor rates in the short term.
However, the ECB raised its inflation forecast for the eurozone for 2024 and 2025 by 0.2 basis points (to 2.5% this year and 2.2% next year), which was not widely expected on the financial markets and was immediately priced into interest rates. After the ECB meeting, market participants downgraded the probability that the ECB would cut interest rates in October and almost ruled out a rate cut in July, which immediately pushed up euro interest rates.
At present, it seems unlikely that we will see the next interest rate cut in July, but a cut in September is possible. Overall, the financial markets are now pricing in two more rate cuts in 2024.
Just like to date, the ECB will make its future decisions dependent on economic data. This also applies to the Euribor and other interest rates, i.e. if the economic data is favourable, it is possible that the Euribor will fall before the next ECB meeting.
As far as interest rates on term deposits and savings accounts are concerned, a reduction in the ECB deposit rate affects the bank's profit if it deposits money overnight with the central bank. This means that banks are likely to cut interest rates on term deposits and savings accounts further.
Oļegs Andrejevs, Head of SEB Saving, investments and pensions offering
