The European Central Bank Cut Interest Rates

ECB has cut interest rates from 0.75 percent to a record low of 0.5 percent, which aims at further easing monetary policy. Therefore, the interest rate offered has thus largely exhausted the ECB.

The importance of the base rate

The interest rate determines the rate at which banks can borrow money from the central bank itself. Thus, changes in interest rates affect the conditions for fixed-rate savings accounts and short-term loans.

Impact on the euro

Decrease the interest rates in Germany tends to less interest in the country’s government bonds and thus unattractive to investors. There is therefore a risk that the currency is generally less demand for a rate cut, and so devalued. The demand for other currencies will rise and investors, speculators, and investors are drawn increasingly into currency areas with higher interest rates. As a result, exports become cheaper and imports are more expensive.

Falling interest rates on loans

Banks can borrow money at low rates now, so refinancing will be cheaper. This money can also be cheaper to pass on to consumers and homebuyers who need financing. The low lending rates will increase the demand for credit and increase the attractiveness of credit, especially with long lock-in periods. For homebuyers and builders, it is worthwhile to pursue long-term fixed interest rates to secure favorable terms. However, companies benefit from favorable financing, which makes investments tend to be more profitable.

Interest on savings accounts

The rate cut causes not only a reduction in interest rates on loans but the interest on investments is also lowered. Therefore, such a rate cut for investors to be unfavorable in the sequence. Falling interest rates could mean a declining incentive for saving and provisions under certain circumstances. People would have more retirement planning in order to protect their living standards in old ages.

Demand for stocks

By simplifying the borrowing may increase the demand for shares, that promise higher returns than fixed-income investments and low-interest rates for investors.

Criticism at low-interest rates

The Federal Association of German Cooperative Banks expressed concern that the persistently low interest detrimental to financial stability since investments are favored that are not economically sustainable.