Those who get into debt smile and those who save lose (a little). The ECB’s third rate cut of another 25 basis points yesterday has concrete effects on families and businesses. A clear advantage for those who access cheaper mortgages and loans, a loss for those who will find themselves with lower returns on bank deposits and returns on variable rate securities. And the economy, in general? It will also depend on the trend of inflation and the ability to stimulate sustainable growth. Rate cuts affect the daily lives and financial decisions of millions of people.
One of the main and most obvious positive effects of this new cut concerns mortgages. Around 3.5 million indebted families will see a reduction in the cost of their mortgage, particularly for those who have chosen variable rates. Mortgages indexed to Euribor, which follow the decisions of the ECB, will benefit from lower monthly repayments. For a 25-year real estate loan of 200 thousand euros, the rate reduction could lead to an overall saving of over 70 thousand euros (-19.3% compared to 2023) according to Fabi calculations. Even for fixed rate mortgages, which currently fluctuate around 3.20%, there are more advantageous conditions compared to previous years.
The cut in interest rates then impacts personal and consumer loans. Consumers can expect a decrease in financing costs for purchases such as cars, appliances or renovations. For example, consumer credit rates, which were above 14% in 2023, have now fallen to 8.58% and could further decline to 8.25%. For a 25 thousand euro car purchased in installments, the savings compared to 2023 can be significant: over 11 thousand euros less (-23%) on a 10-year loan. The purchase of household appliances also becomes more convenient. For a 750 euro washing machine, with a five-year loan, the savings will be around 161 euros (-14.6%).
A less visible but equally important effect concerns public debt. The rate cut also cuts the cost the government pays on the debt. In recent years, interest rates on public debt had soared to 3.76%, but with the new round of cuts, significant savings are expected. According to the Parliamentary Budget Office, if the ECB reduced rates by one percentage point in 2024, the state would save around 3 billion euros.
On the other hand, those who save could suffer losses. The lower rates reduce the remuneration of deposit and savings accounts, penalizing savers. Before the start of the monetary tightening, deposit rates were below 1%, while in 2023 they had reached up to 3.6%. Now, with the ECB’s cut, yields will fall again, and keeping your savings in the bank will yield less. Those who invest in floating rate bonds will also see a decrease in returns. As the price of existing bonds on the secondary market rises, thanks to the inverse correlation with interest rates, new bonds will offer lower yields.
Then there is the indirect impact of businesses. With the cost of money reduced, businesses have easier access to credit to finance investments, expand operations or purchase new machinery. With clear impact on the market. Furthermore, reduced financing costs could incentivize companies to increase hiring or increase investment in research and development, thus fueling overall economic growth.
Another effect, less immediate but equally significant, is that on inflation. Lower interest rates can stimulate demand, boosting consumption and encouraging price increases. This is good for avoiding economic stagnation, but if consumer prices rise too quickly, inflation could erode households’ purchasing power, especially if wages do not rise at the same rate.
Families and businesses will therefore have to adapt to a context of lower rates, taking advantage of the opportunities offered by more accessible credit, but with an eye on savings and inflation.
