The European Central Bank (ECB) cut interest rates for the second time this year on Thursday 12 September. Euronews Business asked the experts how it might impact your personal finances.
On Thursday, the ECB reduced its interest rates during its September meeting for the second time this year with the new rates set at 3.65% for main refinancing operations, 3.90% for the marginal lending facility and 3.50% for the deposit facility.
For context, the interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the rate on the deposit facility is what banks can use to make overnight deposits with the Eurosystem.
The rate on the marginal lending facility offers overnight credit to banks from the Eurosystem.
However, what does this all mean for you and your finances?
Kyle Chapman, FX markets analyst at Ballinger Group, told Euronews in a note: “While the cut has brought down overnight deposit rates, the ECB continues to stay firm on its data-dependent stance and the lack of signalling for the future dragged short-term bond yields slightly higher yesterday.
“That should buoy mortgage rates in the very short term, but with the ECB likely to cut at least at a quarterly pace over the next year, yields will come steadily lower.”
How the ECB rate cut impacts your personal finances
The ECB rate cut is expected to impact different people’s personal finances in different ways, depending on whether they are a borrower, a saver or a lender.
Usually when interest rates are cut, it means that debt is likely to become cheaper.
As a result, people who have put big plans on hold, such as buying or renovating a house, buying a car, taking out a significant business, student or personal loan and similar, are now more likely to go ahead again with these plans.
Mortgage impact
One of the main ways that the ECB rate cut is expected to impact people’s personal finances is through mortgages.
Some mortgages may become cheaper following the rate cut. This would mainly be the case for mortgages with variable interest rates, which can be impacted by both decreasing and rising interest rates.
This in turn, can significantly ease the burden of mortgage repayments, as interest payments for mortgages are often one of the largest monthly expenses for households.
With the ongoing cost of living crisis and soaring inflation hitting so many daily prices, this reduction in mortgages is likely to come as a welcome relief for many struggling households.
However, the ECB’s rate cut is not likely to impact fixed-rate mortgages, which will already have a set interest rate for a certain period of time, usually the entire duration of the loan.
On the other hand, borrowers can choose to refinance their mortgages at a lower interest rate, in case rates fall, although this can still be a major expense in many cases.
Credit card debt impact
Rising inflation and credit card rates have both contributed heavily to several Europeans feeling the pinch in recent months.
According to Deposits.org, the average credit card interest rate in Europe was 5.9%.
However, the recent ECB rate cut could go some way in easing this pressure, by decreasing credit card interest rates as well, as most credit cards tend to have variable interest rates.
As such, users could have an easier time repaying outstanding debt, while also being able to hopefully stick to consistent payment patterns.
This in turn, could contribute to lower debt in the longer term, as more of your payment goes towards decreasing the overall outstanding balance.
However, it may take a while before lower credit card interest rates are implemented, depending on the card provider in question.
Savings impact
Another key way that the ECB rate cut is expected to impact personal finances is through savings accounts’ interest rates, which are likely to fall in line with the extent of the central bank cut.
As a result, savers are likely to get a lower interest rate on their savings, if they use variable savings accounts.
Although this is likely to be the felt most on high yield savings accounts, the decrease is still unlikely to make much of a difference, unless the savings balance is significantly large.
Fixed-rate savings accounts, which have a set interest rate for a specific amount of time, usually 1-3 years, will not be impacted as of now.
However, savers are likely to take a hit on their savings interest income once the fixed term is over, if interest rates are still low.
Other savings instruments such as Certificates of Deposit (CDs), also usually offer fixed interest rates, which are unlikely to be impacted by the ECB rate cut.
However, the providers of these kinds of savings instruments can also choose to lower the fixed interest rate offered for new instruments, in line with the central bank interest decisions, which in turn, may impact new clients.
