A first easing after two years of tightening of monetary policy in the euro zone. The European Central Bank (ECB) announced a cut in its key interest rates on Thursday June 6. The main interest rate, which determines at what price commercial banks can refinance with the ECB, will increase from 4% to 3.75% from June 12. What concrete impacts will this decline have on the daily lives of households and businesses? Response elements.
Rates on real estate loans (very slightly) falling
“A reduction in key rates reduces the ‘cost of money’”, summarizes for franceinfo Stéphanie Villers, economist specializing in the euro zone at PwC France. Commercial banks will therefore be able to grant credit more easily, and on more advantageous conditions. With the fall in rates, they will be able to refinance more easily with the ECB, as was the case before the institution began an unprecedented tightening of its monetary policy in July 2022 (ten successive rate increases) for counter galloping inflation.
This drop in rates could therefore allow an increase in the granting of real estate loans, with lower rates. “The real estate rate will continue to soften”as is already the case in recent months, anticipates Stéphanie Villers, who recalls that“we had climbed very high” : the average rate for a new property loan had reached 4.17% (excluding insurance) in January 2024, the highest rate in almost ten years, according to the Banque de France. It has already started to come down from this peak, according to the institution’s figures, and “oWe can expect a drop in the real estate rate of 1 percentage point from the high point by the end of the year, if the market is reassured.estimates the economist.
But this drop in interest rates should be limited, because “banks are generally more inclined to pass on to their consumers an increase in the cost of money than a decrease”, analyzes Jezabel Couppey-Soubeyran, economist and lecturer at the University of Paris 1 Panthéon-Sorbonne. She points out that there is not necessarily an automatic link between the ECB’s key rates and the interest rates at which banks lend: “The central bank’s liquidity is only used for exchanges between it and the banks, or between the banks”.
“It is by extending credit to other economic agents that commercial banks create money, and they decide on the interest rate they apply.”
Jezabel Couppey-Soubeyran, economistat franceinfo
The reduction in the ECB’s key rates may therefore not have a marked effect on the revival of demand for credit, and the real estate market in the broad sense. “I rather think that the French are waiting for a drop in prices [des biens immobiliers], and I fear that this drop in prices will not really come”estimated in May on franceinfo Daniel Baal, president of Crédit Mutuel federal alliance.
Savings accounts with stable rates (for now)
The reduction in the ECB’s key rates could also make savings accounts less profitable. The interest rate of the Livret A is for example determined by several economic variables which partly follow the rates of the institution based in Frankfurt (Germany), such as the evolution of inflation and the rate at which banks lend between them, explains the Ministry of the Economy. But it is set by the State in the last instance, and “Bruno Le Maire promised that it would remain at 3% until January 2025”recalls Stéphanie Villers.
The drop in key rates will therefore have no short-term impact on the preferred investment of the French, nor on the Sustainable and Solidarity Development Booklet (LDDS), which remunerates savings at the same rate of 3%. But these rates could therefore fall in 2025, if we stick to the calculation formula.
Better prospects for business investment
Thanks to the banks’ greater room for maneuver, businesses will also be able to borrow more easily and under better conditions, to refinance or to invest. “This rate cut is a very good signal to businesses, which were in a somewhat wait-and-see period” analyzes Stéphanie Villers.
“They suffered from weak consumption last year and, since the start of the year, we have seen that households are spending morerecalls the expert. So if rates are also likely to ease, that’s good news for investment.” Good news whose effect could be largely psychological.
“Central banks are very attentive to the expectations that other economic players make, and they try to influence them.”
Jezabel Couppey-Soubeyran, economistat franceinfo
“Even if the announced drop in key rates is small, if we anticipate that they will continue to fall, we can think that economic players will be able to borrow more, buy, and that the economy will be more dynamicdetails Jezabel Couppey-Soubeyran. IIt will therefore be easier to make investments profitable now to meet future demand.“
Risky investments (very slightly) more profitable
On the other hand, for investors, a drop in key rates generally favors an increase in asset prices, from real estate to stocks. “When the price of silver falls, we can go into more debt to invest in the real economy, but also to buy securities with more or less speculative perspectivesexplains Jezabel Couppey-Soubeyran. And the higher the demand for securities, the higher their price rises.”
But there too, “the markets already mostly anticipate a reduction in ECB rates in their price decisionsbelieves Stéphanie Villers. Confirmation of the consensus will not fundamentally change things.”
Effects suspended from other decisions
“This reduction, on its own, will not have a major effect for businesses or households”, believes Stéphanie Villers. Already, because its scale is very limited. “The easing will be extremely gradual, it’s only 0.25 points. And if he continues, it will be for the long term.” An analysis confirmed by the ECB, which insists in its press release that it “does not commit in advance to a particular rate trajectory” and that she “will maintain a data-driven, meeting-by-meeting approach to appropriately determine the degree and duration of this restrictive guidance”.
This progressivity must in particular avoid restarting inflation which, at 2.2% over one year in May, is still above the 2% objective targeted by the ECB. However, a reduction in interest rates risks promoting growth, but also an increase in prices, for example by facilitating loans and therefore purchases or investments. “The ECB is cautious”insists Stéphanie Villers.
“The ECB explains that given the stabilization of inflation, there is less need to maintain high rates. But there is no reason to lower them sharply either.”
Jezabel Couppey-Soubeyran, economistat franceinfo
And moreover, the markets do not only carefully scrutinize the ECB’s announcements. “The other world reference is the Fed, the American Central Bank” recalls Stéphanie Villers.
“For the financial markets to integrate the idea that we are entering a period of monetary easing, we must wait for the Fed’s decision.”
Stéphanie Villers, economistat franceinfo
“The Fed has indicated that it is not considering cutting rates before the fall”, recalls the specialist. For the global context to be officially more favorable to activity, with more visible consequences on credits, investment or placements, we will therefore have to wait at least a few months.