What Does the ECB Rate Cut Mean for You?

A year ago, the European Central Bank (ECB) its interest rate to a peak of 4 percent. However, due to a steady slowdown in inflation, the interest rate has now turned around. In June, the ECB rate already fell by 25 basis points and on Thursday a second cut followed to 3,50 percent. This could have consequences for savers, borrowers and investors.

The saver: possibly lower savings interest rates

The ECB interest rate is an important indicator for the interest rate on savings accounts and short-term deposits. A fall in the ECB rate could lead to couches lower their savings rates. This is already easier than in recent weeks, when banks were fighting for your money with high interest rates.

This battle now seems to be coming to an end. Crelan is the first bank to lower the gross interest rate on its one-year deposit from 3,50 percent to 3,10 percent on Friday. Although the high interest rates will disappear, this does not mean that all savings rates will come under pressure due to the ECB rate cut. Most savings accounts still offer an interest rate that is considerably lower than the new ECB rate.

For long-term savings products, the long-term interest rate is more important. The direction of this interest rate is more difficult to predict. The chief economist of BNP Paribas Fortis, Koen De Leus, states that the long-term interest rate has already anticipated lower ECB rates in recent months. The Belgian long-term interest rate (ten years) is currently at 2,7 percent, compared to 3,3 percent a year ago.

According to De Leus, there may still be a maximum of 50 basis points, but then the ECB rate must certainly evolve towards 2,50 percent or lower. The expectation is that the economy will land softly, which could cause the ECB rate to end up at 2,5 percent next year. But if a recession occurs, the rate can of course fall even further.

This could mean that the yield curve will steepen somewhat in the coming months, with long-term savings products yielding more than short-term savings products. At the moment, this is hardly the case.

The Borrower: Nice Benefit, But Temper Your Enthusiasm

For those who want to take out a loan in the coming weeks, the ECB's decision is favorable. Home loan rates have already fallen significantly due to the fall in long-term interest rates. According to figures from credit advisor Immotheker-Finotheker, the rate for a 20-year fixed-rate loan is now 3,05 percent, the lowest level in two years.

According to De Leus, mortgages could possibly become a little cheaper if long-term interest rates fall further, but he warns that expectations should not be too high. People should not expect mortgages to become as cheap as before the corona crisis. Moreover, the battle for savings and higher savings interest rates mean that banks have less room to lower their mortgage rates further.

For people with a fixed interest rate, a change in the market interest rate will of course have no effect. In recent years, approximately 90 percent of Belgians have opted for a loan with a fixed interest rate. Due to the drop in rates, refinancing the loan may become an option, although this also depends on the remaining term of the loan and the interest rate at which you took out the loan. A general rule is that the current rates must be at least 1 percentage point lower than the interest rate at which you borrow to make refinancing attractive.

However, the ECB interest rate drop may affect people with a variable interest rate. The effect depends on the chosen formula. An interest rate cut will filter through fastest to borrowers who have the interest rate of their loan adjusted annually. If you have opted for an adjustment every three, five or ten years, the current interest rate cut will play a lesser role, unless you are soon at the end of that three, five or ten-year period.

The investor: favorable for shares

Interest rate declines are generally good news for equity investors. When saving yields are lower, equities become a more attractive alternative. Furthermore, future corporate earnings are worth more when long-term interest rates are lower, which can have a positive impact on equity valuations.

Typical interest-sensitive stocks pay a nice and sustainable dividend. Examples are regulated real estate companies or utilities such as Elia and Fluxys Belgium. Companies with a lot of debt are also interest-sensitive.