Mortgages will fall in price by 400 euros per year after the ECB rate cut

The European Central Bank (ECB) yesterday approved the expected 0.25 percentage point cut in benchmark interest rates it has been promoting since January, while leaving the door more or less open for more cuts. But at the same time, he insisted that he would continue to “not commit in advance to any particular path” for easing monetary policy, as he would need to collect “sufficient evidence that is gradually arriving” to confirm that the eurozone is in crisis. disinflationary process. “I cannot confirm that the withdrawal phase (of rate increases) is underway. The likelihood of this is high, but it will depend on the data. And what is very uncertain is the speed at which we will travel and the time it will take,” warned its President Christine Lagarde.

Thus, base rates are falling after monetary authorities raised them to combat high inflation at a pace and scale unprecedented since their inception in 1999: 4.5 percentage points in 10 consecutive meetings between July 2022 and September last year. of the year. The prime rate is reduced to 4.25% (the first reduction since March 2016), and the deposit rate – the interest that rewards money saved in banks, most relevant in the current environment – falls to 3.75% (the first reduction since September 2019 ), in both cases to the level of August last year. Economy Minister Carlos Bodi considered it a “turning point” and “good news” and estimated it could reduce the mortgage payments of families who will have to renegotiate their loans in the coming months by around 400 euros a year. .

Thus, monetary authorities are very cautiously beginning to de-escalate the fight against the inflation crisis, which erupted in the summer of 2021 and was aggravated by Russia’s invasion of Ukraine in February 2022. A contrary decision would be a big surprise. , since he’s been telegraphing this for months. In fact, the big question on the minds of the market, analysts and households this Thursday was what the ECB’s governing council will do in the four meetings it will hold until the end of 2024. Lagarde avoided giving clues: “I’m not going to say today or at any time before the end of the summer whether we’ll do it now or do something different at another time.”

Fewer expected downturns

Before Lagarde cooled expectations for the first cut in the spring in January and delayed it until the summer, market consensus was for five cuts in a year, starting in April. Having accepted the ECB’s warnings, analysts adjusted their expectations and reduced the expected rate cut to three or four by 0.25 points. However, forecasts have cooled further in recent weeks: the consensus is for a fall of 0.6 points for the year including this Thursday, meaning most are split between expecting two cuts (0.5 points) or three (0.75 points). ).

Some recent data explains this. Wages in the euro zone rose 4.7% in the first quarter, compared with a 4.5% rise in the final three months of last year, even though growth was expected to be moderate. Likewise, eurozone inflation rose by two-tenths in May to 2.6%, but most importantly, service sector inflation (which has weighed most heavily on prices for several months) rose from 3.7% in April to 4.1%.

It’s the negative inflation-busting data that complicates the outlook for the ECB, which must choose between the risk of cutting rates too slowly and thereby damaging economic activity and the risk of doing so too quickly and backtracking if the consumer price index fails. falls as expected. Especially when recent data has forecast higher inflation and growth in the short to medium term than expected in March.