- On 6 June the ECB cut rates by a quarter point, its first cut in almost five years, without committing to further reductions.
- Relief begins for mortgage holders and indebted companies, as borrowed money becomes somewhat cheaper.
- It is also the end of high returns on deposits: it is worth reviewing where cash is held.
On 6 June 2024, the European Central Bank cut interest rates by a quarter point. It was the first cut in almost five years, and it ended a cycle of rises that had notably increased the cost of financing for families and companies. The central bank, however, did not commit to further reductions, so the timetable for the next decisions remained open. That caution is usual: a central bank prefers to check that inflation keeps easing before committing to a specific path.
A quarter point, on its own, is a modest figure. Its importance lies in the direction: after years in which every meeting was an occasion to fear a new rise, the sense of movement changed. For borrowers, the change of sign is good news; for savers, it is a reason to review calmly where their cash is held.
What changes
The official rate is the price at which the central bank lends money to banks, and from it the other rates in the economy are formed: those on mortgages, on loans to companies and on deposits. When it falls, borrowed money becomes somewhat cheaper, gradually and with differences between products. It is the beginning of relief for mortgage holders and indebted companies. For a family with a variable-rate mortgage, the improvement will be visible, though gradual, in the payment over the coming months; for a company, in the cost of renewing its financing.
Not everyone will feel it at once. Variable-rate loans are reviewed on different dates, and fixed-rate ones do not change until they are renegotiated. And since the ECB did not commit to further cuts, nobody should build their budget on a chain of reductions that does not yet exist: each decision will depend on the inflation and growth data. There may be pauses and the path may be slower than some expected, and that is perfectly normal.
The other side: savings
It was also the end of high returns on deposits. During the period of high rates, some banks offered attractive returns for leaving money in accounts and deposits. When rates fall, banks usually pay less on savings, so reviewing where cash was held became timely. The return on an account or a deposit usually moves with official rates, with some lag behind them.
This affects many families, who keep a good part of their wealth in cash, and companies that hold surplus funds. The point is not to move money out of habit but to compare what each alternative offers, over what term and on what conditions, and to understand how much risk and how much availability one is willing to accept in exchange for a somewhat higher return. A higher return almost always means less availability, a longer term or more risk, and it is worth knowing which of the three is being accepted.
What to review
It is worth comparing the returns on deposits and accounts, reviewing the payments on variable-rate loans and mortgages when due, and deciding how much liquidity is really needed in the short term. A good practice is to separate the money that may be needed in the coming months from that which will not be used soon.
An adviser can help carry out that exercise with the real numbers of each family or company, avoiding impulsive decisions. In any case, the cut in rates is not a signal to borrow more or to take risks one does not understand: it is, above all, an opportunity to put finances in order with a somewhat more favourable outlook than in recent years. Every family and every company has its own calendar of maturities, and that is where planning adds the most value.
When rates change, look at both sides of the balance sheet.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
