- On 17 October the ECB cut rates for the third time in the year, after euro-area inflation fell below 2% in September for the first time since 2021.
- Europe was entering a phase of lower rates with weak growth, a usual combination when a central bank tries to sustain activity.
- For Spain, growing faster than average, it was a favourable scenario, but each decision should rest on the specific project and not only on rates.
On 17 October 2024, the European Central Bank cut interest rates for the third time in the year. The decision came after euro-area inflation fell below 2% in September for the first time since 2021, that is, below the level the central bank itself considers desirable over the medium term. The main goal of monetary policy seemed, at last, within reach.
With inflation more under control, the ECB’s concern was beginning to shift to another front: European growth, which was showing signs of weakness. This combination of lower inflation and fragile activity explains why the central bank was willing to make money cheaper with more determination than months earlier, and why it is worth understanding what it means for anyone taking decisions on saving, investing or financing.
Inflation below 2%
With prices calmer, the ECB had more room to act. When inflation nears the target, the central bank can afford to ease its policy without fearing that prices will run away.
It should be remembered, however, that a single figure is not a trend. The prices of energy, food or services can alter the numbers from one month to the next, and central banks look at the whole picture before deciding. The September figure fed confidence that inflation was still falling, but it did not remove the need to keep watching the data. Central banks prefer to confirm a trend before committing to it.
Lower rates, weak growth
Europe was entering a phase of lower rates with weak growth. It is a usual combination when a central bank tries to sustain activity: it makes money cheaper to encourage spending and investment, although the effects take time to show. Lower rates reduce the cost of financing a purchase or a project, but they need time to pass through to the real economy. Depending on the sector, the effect may be felt sooner in consumer credit and mortgages than in business investment.
An environment like this invites prudence. Weak growth is usually accompanied by caution among companies and households, who may postpone investments and purchases even if credit is cheaper. That is why the cut in rates does not guarantee an immediate recovery, and anyone expecting cheaper money alone to reactivate their business may be disappointed.
Spain, in a better position
For Spain, growing faster than average, it was a favourable scenario for investment. An economy with more dynamism and cheaper financing offers better conditions for taking on projects, expanding capacity or acquiring assets. The combination of both factors can make it easier to take decisions that in other circumstances would have been postponed. But that does not remove the need to analyse each deal on its own merits.
Even so, each investment or financing decision should rest on the specific project and not only on the level of rates. A good business plan, with defined clients, realistic costs and ability to pay, withstands changes in the environment better than one that depends on money remaining cheap. And financing should always be reviewed with an adviser who knows the full situation. That avoids turning a passing advantage into a structural risk.
Cheap money helps, but it does not replace a good project.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
