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Projected ECB Interest Rate in Five Years: Rates Cut Started In The Eurozone

Last Updated March 7, 2024 2:10 PM
Giuseppe Ciccomascolo
Last Updated March 7, 2024 2:10 PM

Key Takeaways

  • The European Central Bank cut the interest rates in June.
  • The eurozone bank has made the first cut since 2019.
  • The bank’s next decision on monetary policy will be on July 8.
  • What is the impact of interest rates on cryptocurrencies?

On Thursday, June 6, 2024, the European Central Bank cut interest rates  for the first time since 2019, outpacing the US Federal Reserve and the Bank of England.

The Frankfurt-based institution reduced rates by 25 basis points, a move that was widely anticipated by the markets. Before today’s move, the ECB  has implemented 450 basis points, or 4.5 percentage points, worth of rate hikes since July 2022, initiating its first interest rate hike in 11 years.

Rates Cut By 25 Basis Points

After the ECB’s move, the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility now stand at 4.25%, 4.50%, and 3.75%, respectively.

This decision did not surprise the markets, as minutes  from April’s meeting had confirmed intentions for a June cut. The minutes indicated that the Governing Council might begin “easing monetary policy restrictions at the June meeting if additional evidence confirmed the medium-term inflation outlook embedded in the March projections.”

In a statement on Thursday, the ECB said: “Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady. Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons.”

The statement added that “the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.”

Outlook Changed

The ECB’s new forecasts indicate stronger-than-previously-expected price pressures in the near term but continue to show inflation settling below 2 percent over the medium term.

Inflation is now projected to average 2.5 percent in 2024 and 2.2 percent in 2025, up from March forecasts of 2.3% and 2.0%, respectively. The 2026 projection remains unchanged at 1.9%.

ECB staff are also more optimistic about near-term growth prospects, raising the forecast for this year to 0.9 percent from 0.6 percent in March. However, the 2025 forecast has been slightly reduced to 1.4% from 1.5%, with the 2026 forecast remaining unchanged at 1.6%.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, told CCN: “The Eurozone is in the recovery stage, with growth rising by 0.3% in the first three months of the year, after six quarters of stagnation or contraction.

“Unlike previous economic rough patches, firms have retained workers – with unemployment now at an all-time low. This means that stubborn pay growth remains a concern for policymakers, following a rise in negotiated salaries. There are concerns that it could feed further into higher prices, which is why policymakers are expected to stay more cautious in the months ahead.

“If higher borrowing costs persist, this is set to have a further knock-on effect on the bloc’s economy, which is only just on the mend. Unemployment is forecast to rise, which may help ease pay pressures, but could cause a fresh weakening in economic activity. Even if interest rates creep down again later this year, as expected, it may not stop further problems for the commercial property sector, given the jump in refinancing costs that many firms will still be facing.”

Inflation Accelerates In May

Inflation in the Eurozone accelerated more than anticipated in May, according to preliminary data released by Eurostat .

Yearly consumer price inflation in the Eurozone increased to 2.6% in May, up from 2.4% in April. This rise exceeded expectations , as FXStreet had projected a 2.5% increase.

On a monthly basis, the Consumer Price Index (CPI) saw a 0.2% uptick in May, following a 0.6% rise in April compared to March.

Core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, climbed to 2.9% in May, up from 2.7% in April. This was also higher than FXStreet’s forecast of 2.8%.

Monthly core consumer prices rose by 0.4% in May, a slowdown from the 0.7% increase observed in April.

Economic Growth Improved

Eurozone gross domestic product (GDP)  and employment increased in the first quarter of 2024, Eurostat confirmed on Friday, June 7, 2024.

Year-on-year, seasonally adjusted GDP grew by 0.4% in the eurozone, up from the 0.2% annual growth recorded in the fourth quarter of 2023.

Quarter-on-quarter, seasonally adjusted GDP rose by 0.3% in the first quarter, reversing a 0.1% decline in the previous quarter. These figures corroborate the estimates released by Eurostat on May 15.

Meanwhile, annual growth in eurozone employment  slowed to 1.0% in the first quarter of 2024, down from 1.2% in the fourth quarter of 2023.

Quarter-on-quarter, employment in the eurozone increased by 0.3% in the first quarter of 2024, maintaining the same growth rate as in the final quarter of 2023.

Additionally, seasonally adjusted service production in the eurozone in March was 2.3% higher year-on-year, although it declined by 0.4% on a monthly basis.

Introducing the European Central Bank (ECB)

The European Central Bank (ECB) serves as a central component within the Eurosystem and the European System of Central Banks (ESCB), making it one of the seven institutions of the European Union (EU). It holds a position of immense significance on the global stage as one of the world’s foremost central banks.

The ECB Governing Council assumes the responsibility of formulating monetary policy for both the Eurozone and the European Union. It manages the foreign exchange reserves of EU member states, conducting foreign exchange operations, and defining the intermediate monetary objectives and key interest rates  within the EU. 

To execute these policies and decisions, the ECB Executive Board operates under the authority of the Governing Council and may issue directives to the national central banks as needed. Additionally, the ECB possesses the exclusive authority to authorize the issuance of euro banknotes. While the issuance of euro coins by member states requires prior approval from the ECB. The ECB also oversees the functioning of the TARGET2 payments system.

Established in May 1999 through the Treaty of Amsterdam, the ECB has the crucial mission of ensuring and preserving price stability. Subsequently, on December 1, 2009, the Treaty of Lisbon came into effect, officially designating the ECB as an EU institution.

Eurozone Expansion

Initially, the ECB was established to serve the Eurozone, consisting of eleven member countries. Over time, the Eurozone expanded to include Greece in January 2001. It also added Slovenia in January 2007, Cyprus, and Malta in January 2008. Furthermore, Slovakia in January 2009, Estonia in January 2011, Latvia in January 2014, Lithuania in January 2015, and Croatia in January 2023. 

Currently, to lead of the ECB is President Christine Lagarde and the bank’s headquarter is in Frankfurt, Germany. Before its new headquarters, it operated from the Eurotower.

The ECB operates in direct accordance with European Union law. Its €11 billion capital stock is collectively owned by all 27 central banks of EU member states as shareholders. The initial capital allocation key, based on the population and GDP of member states, was established in 1998 but has since undergone adjustments. Notably, shares within the ECB are non-transferable and cannot serve as collateral.

ECB Interest Rates

The key interest rates are instrumental tools the ECB uses within its operational framework to preserve price stability within the euro area.

These rates hold significant importance in conducting monetary policy, as they directly impact the cost of borrowing for various economic entities. These include governments, businesses, and households, both in capital markets and the market for bank loans. Furthermore, they influence the returns on various saving instruments, such as bank deposits.

Consequently, the ECB’s monetary policy decisions have a far-reaching impact on the spending, saving, and investment choices of households and businesses. It ultimately affects overall economic activity and, in turn, inflation rates.

ECB Interest Rate in 5 Years Projection
How interest rates moved in the eurozone

The ECB maintains three key interest rates:

Main Refinancing Operations (MROs) Interest Rate

ECB establishes this rate to provide the banking system with weekly liquidity injections. It determines the cost incurred by credit institutions when borrowing funds from the ECB for one week.

Deposit Facility Rate

The ECB also sets the rate for the deposit facility. This dictates the interest paid to credit institutions for their overnight deposits held at the central bank. Notably, the deposit facility rate remained in negative territory from 2014 until July 2022.

Marginal Lending Facility Rate

This rate represents the cost borne by credit institutions when they borrow money overnight from the ECB.

These interest rates are pivotal tools in the ECB’s pursuit of its monetary policy objectives. They significantly influence the broader economic landscape and inflation dynamics.

Eurozone Interest Rate Projections For The Next 5 Years

Given the multitude of uncertainties currently in play, formulating a realistic forecast for ECB interest rates over the next five years presents a considerable challenge. Nevertheless, the European Central Bank itself has offered projections extending as far as 2025 in its survey of professional forecasters.

According to their ECB interest rate predictions, they foresaw a rise to 3% in Q1 2023, a figure already materialized. They also predicted a further increase to 3.5% in Q2, followed by a gradual decrease below 3% in 2024 and 2025.

In contrast, ING’s March policy rate forecasts suggested the ECB interest rate would climb to 3.5% in Q1 2023. It would then and reach 4% in Q2, maintaining this level until early 2024. Their analysts expected a rate of 3.5% in late 2024, gradually declining to 3% in late 2025.

Trading Economics anticipated a decrease to 2.75% in 2024 and a further decline to 1.5% in 2025, based on their econometric models.

ECB Interest Rate in 5 Years Projection
Projections on eurozone interest rates

The Influence Of Interest Rates On Cryptocurrency

Cryptocurrencies, Bitcoin included, have demonstrated remarkable resilience even in the face of rising interest rates. Notably, Bitcoin experienced significant growth, with a surge of 2,000% observed during the years 2015 and 2016.

However, it is crucial to recognize that elevated interest rates can produce diverse effects on the cryptocurrency market. Some experts argue that persistent high inflation, rising gas prices, and increased energy costs linked to higher interest rates may potentially reduce risk appetite. This would thus create challenges for cryptocurrencies.

Central Banks And Their Impact On Cryptocurrencies

Central banks wield significant influence in shaping economic conditions as they directly impact money circulation and financial market stability. Their ability to adjust interest rates has a direct bearing on borrowing rates for financial and banking institutions.

In response to widespread inflation, major central banks in developed economies, such as the Fed, the ECB, and the BoE have chosen to raise interest rates.

It is worth noting the increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts. The decisions to raise interest rates, particularly by the Fed, have immediate repercussions for cryptocurrency markets.

The Federal Reserve’s more assertive stance has injected uncertainty into the cryptocurrency space. This also affected market sentiment as tighter monetary policies take hold.

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