Here we are, after almost two years some oxygen is arriving for families and businesses. After ten consecutive increases, Frankfurt today cut interest rates by a quarter of a point. On the eve of the European elections, the ECB stopped the bullish policy that began in July 2022. It is the first time since 2008 that the cost of money has been reduced because inflation is approaching the 2% target and not because we have to fight a financial crisis. The impact will be for investors, citizens, businesses and the States of the Union. Of course, it also depends on the speed with which the decrease in the cost of money will proceed. But the consequences begin immediately.
First of all, lighter mortgage repayments. Those who have a variable rate mortgage will especially notice this. Facile.it calculated an immediate drop of 18 euros per month. An installment that in May 2024 reached 747 euros per month could drop by 37 euros by the end of the year and reach 692 euros in 12 months. Those with a fixed rate mortgage could pay 100 euros less per month by summer 2025. This also means relief for the real estate market which in recent years has suffered from the impact of monetary policy on mortgages and therefore less availability of families.
Cheaper credit also means an increase in loans, for families and businesses who can access it more advantageously. Consequences? A boost to the recovery of consumption and investments. More corporate funds spent on productive and commercial activities translate into fuel for the country's economic activity and employment.
Then there is the beneficial effect for the state coffers. With a public debt of 2,900 billion euros, it is better to have to pay lower interest. The Parliamentary Budget Office has calculated a possible saving of 3 billion already during 2024, if the cut between now and December is around 100 basis points. Therefore less heavy public debt with cut rates.
On the other hand there are two “buts”. Government bonds risk becoming less attractive as interest rates fall. In fact, returns are decreasing for consumers who have invested in BTPs in recent years precisely because the high cost of money meant a higher income. It could be a problem for the Meloni government which has relied on securities dedicated specifically to small savers. It is also true, however, that high BTP yields are an expense for the State, which will therefore decrease with the rate cut.
The other “but” is the euro. Softer monetary policy usually weakens the currency. And the ECB has taken a more accommodating path than the Fed (a rate cut overseas is not expected next week, barring surprises). Therefore the euro is weaker against the dollar. Consequence? Imports in American currency will be more expensive for the countries of the Union. Businesses could suffer as long as there is no realignment between the US and the Eurozone.
