ECB and Fed want to lower key interest rates: The consequences for your money

How much will the ECB and Fed cut interest rates?

It is considered certain that the ECB and Fed will lower their interest rates in September. What is unclear, however, is how high the interest rate hikes will be and what will happen until the end of the year. “The time for interest rate cuts has finally come in the USA too.” “The ECB and Fed are likely to lower key interest rates at their next meetings,” says HQ Trust chief economist Michael Heise.

“The time for adjustment has come,” said Fed Chairman Jerome Powell himself. “The direction is clear. The timing and pace of rate cuts will depend on the data, forecasts and the balance of risks.”

The markets are expecting the ECB and Fed to raise interest rates by 0.25 percentage points each in this round of interest rate hikes. In the US, the weak labor market data has also brought a major hike of 0.5 points back into focus.

Further interest rate cuts until 2025

“The Fed, which according to Powell does not want a further weakening of the labor market, must now act quickly,” says Bantleon US economist Andreas Busch. The labor market data make an interest rate hike of 0.5 percentage points in the USA “somewhat more likely.”

Bantleon expects a further interest rate cut of 0.5 percentage points in the autumn. The key interest rates in the USA would then fall to three percent in the spring of 2025. So far, futures markets have only priced in an easing to 3.75 percent in the medium term. But the direction is clear.

This also applies to the ECB. Deutsche Bank expects key interest rates in the euro zone to fall to a “landing zone” of between two and 2.5 percent in 2025. HQ Trust economist Heise also says: “The interest rate cuts will be the starting point for further steps in the coming months.”

Will interest rate cuts help the German economy?

Interest rate cuts stimulate the economy. Low interest rates make investments cheaper for companies. For consumers, consumption becomes more attractive relative to saving. Both boost demand. In Germany, there are high hopes for higher consumer spending because incomes have risen sharply. Up to now, households have preferred to save this money.

However, interest rate cuts only have an effect after a delay. A quick push is also unlikely. Help anyway. The high interest rates have hit the German economy hard. Germany is at the bottom of the list in Europe in terms of growth. The economy shrank in 2023 and will hardly grow in 2024 either. The faster and more strongly interest rates fall, the better for the economy.

Read also

All forecasts for the German economy in 2024 and 2025 at a glance

The consequences of the interest rate turnaround for overnight and fixed-term deposits

For savers, the ECB's interest rate hikes have reduced the time and ended some negative savings rates. Banks and savings banks have significantly increased their interest rates for overnight and fixed-term deposits. They are still offering attractive interest rates, especially to new customers, and for some time now they have also been above the inflation rate.

An analysis by the comparison portal Verivox for Business Insider shows which banks currently pay the highest interest rates for call money and fixed-term deposits.

The Italian Banca Progetto pays the highest interest rates for one- and two-year fixed-term deposits at 3.7 percent each. Those who prefer to invest their money at a bank in Germany must expect slightly lower interest rates. Isbank offers 3.6 percent for one-year fixed-term deposits.

Trade Republic currently pays even higher interest rates of 3.75 percent for overnight money. However, you must have an account with the online broker to do this. The fact that many banks charge lower interest rates for longer terms than for shorter ones shows that banks are expecting interest rates to fall.

Read also

These banks now offer attractive interest rates on overnight and fixed-term deposits

Construction interest rates: More planning security

Mortgage interest rates are based more on capital market returns than on key interest rates. The interest rates on the relevant federal bonds rose from minus 0.8 percent to just over three percent during the interest rate cycle. Construction loans also rose accordingly – and many construction plans were placed. Now a turnaround is in sight.

For the first time since the beginning of the year, the best construction interest rates for a 10-year term and very good credit ratings are again below the 3 percent mark, says Oliver Kohnen from the loan broker Baufi 24. “On average, mortgage loans in July and August had interest rates of around 3.2 percent. Even so, they were well below the 3.5 percent that home builders have had to calculate with in recent months.”

This means that interest rates are anticipating a further reduction of 0.25 percentage points, says Kohnen. “This opens up an interesting window of opportunity for property buyers.” He does not expect any further significant downward interest rate developments in the near future, and property prices have been rising again for some time.

Installment loans and overdrafts are becoming cheaper

The situation is completely different for borrowers: interest rates for installment loans have risen sharply over the interest rate cycle. Now they could fall somewhat. However, experience shows that many banks increase their loan interest rates quickly but only reduce them slowly. A comparison is therefore particularly worthwhile in times of interest rate changes. For some borrowers, refinancing can also be worthwhile.

ECB interest rate cut: stocks and currencies

On the stock and currency markets, players are not expecting any major swings – if the expected interest rate hikes of 0.25 points are carried out. “The expected interest rate cuts, which are already reflected in the current valuations of stocks and bonds, are unlikely to provide a boost to the financial markets,” said Michael Heise. The German stock index Dax had already risen to a record high of 19,000 points in anticipation of further interest rate cuts.

However, a larger interest rate hike could trigger a boost on the stock markets. It will also be important to see what ECB President Christine Lagarde and Fed Chairman Jerome Powell say about further interest rate cuts by the end of the year.

Interest rates also have an impact on exchange rates. The main factor here is the interest rate gap between the USA and the Eurozone. Powell's announcement that the time has come for interest rate changes in the USA has already caused the dollar to fall somewhat. The euro gained against the dollar in the summer. At the end of the week it remained above the 1.11 euro per US dollar mark.

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