What impact will the ECB rate cut have on your personal finances?

This article was originally published in English

On Thursday, the ECB reduced its interest rates during its September meeting for the second time this year, with new rates set at 3.65% for the main refinancing operations, 3.90% for the marginal lending facility and 3.50% for the deposit facility.

To contextualize, the interest rate on principal transactions The financing rate is what banks pay when they borrow money from the ECB for a week, while the type of deposit facility is the one that banks can use to make overnight deposits in the Eurosystem. marginal lending facility rate provides Eurosystem banks with overnight credit.

But what does all this mean for you and your finances?

Kyle Chapman, currency market analyst at Ballinger Group, told Euronews in a note: “Although the cut has brought down overnight deposit rates, the ECB remains steadfast in its data-dependent stance and the lack of forward-looking signals dragged short-term bond yields slightly higher yesterday.”

“This should boost very short-term mortgage ratesbut with the ECB likely to cut rates at least on a quarterly basis over the next year, yields will gradually decline.”

How the ECB rate cut affects your personal finances

The ECB rate cut is expected to affect the personal finances of different people differently, depending on whether they are borrowers, savers or lenders. Typically, When interest rates are reduced, debt is likely to become cheaper.

As a result, people who have put off big plans, such as buying or renovating a home, purchasing a car, taking out a large business, student or personal loan and the like, are now more likely to go ahead with these plans.

Mortgage impact

One of the main ways the ECB rate cut is expected to affect citizens’ personal finances is through mortgages.

Some mortgages could become cheaper after the rate cut. This would be mainly the case of the variable interest rate mortgageswhich can be affected by both rising and falling interest rates.

This, in turn, can significantly ease the burden of mortgage repayments, as mortgage interest payments are often one of the largest monthly household expenses.

With the current cost of living crisis and rampant inflation affecting so many everyday prices, this mortgage relief is likely to come as a welcome relief to many struggling households.

However, ECB rate cut unlikely to affect fixed-rate mortgageswhich will already have an interest rate set for a certain period of time, normally the entire duration of the loan.

On the other hand, borrowers may choose to refinance their mortgages at a lower interest rate, should rates fall, although this can still be a significant expense in many cases.

Impact of credit card debt

Rising inflation and credit card rates have largely contributed to several Europeans finding themselves in trouble in recent months. According to Deposits.org, The average interest rate on credit cards in Europe was 5.9%.

However, the recent rate cut by the ECB could alleviate this pressure to some extentalso by reducing the interest rates on credit cards, since most of these usually have variable interest rates. In this way, Users would find it easier to repay outstanding debtwhile being able to maintain consistent payment patterns.

This, in turn, could help reduce debt in the long run, as more of the payment goes towards reducing the total outstanding balance. However, depending on the credit card provider in question, It may take some time before lower interest rates apply.

Effects on savings

Another important way the ECB rate cut is expected to affect personal finances is through the savings account interest rateswhich are likely to fall in line with the extent of the central bank’s rate cut. As a result, savers are likely to get a lower interest rate on their savings if they use variable savings accounts.

While this is likely to be more noticeable in high-yield savings accounts, the decrease is unlikely to make much of a difference unless the savings balance is very large.

Fixed rate savings accountswhich have a fixed interest rate for a set period of time, usually 1 to 3 years, will not be affected for nowHowever, savers are likely to see their interest income reduced once the fixed-term deposit expires if interest rates remain low.

Other savings instruments, such as certificates of deposit (CDs), also typically offer fixed interest rates, which are unlikely to be affected by the ECB’s rate cut.

However, providers of such savings instruments may also choose to reduce the fixed interest rate offered for new instruments, in line with central bank interest rate decisions, which in turn may impact new customers.