The ECB’s fourth cut of the year

On 12 December 2024, the European Central Bank cut interest rates again by a quarter point, to 3%, and opened the door to further cuts in 2025 given weak European growth. It was the fourth cut of the year, after those of June, September and October, and it completed a path that had brought money back to a notably lower cost than at its 2023 peak. Euribor, the reference for a good part of mortgages, reflected that movement with a lag but clearly.

For the average household and the medium-sized company, a year of cuts does not translate into a spectacular change overnight but into gradual relief, felt in mortgage reviews, loan renewals and the returns on deposits. The end of the year is the best moment to take stock and calmly plan what lies ahead.

What the ECB decided

The ECB left open the possibility of further cuts in 2025, and that matters as much as the cut itself. Opening the door is not committing: it means it does not rule out further cuts if the data justify them, without setting a timetable. It is a way of keeping its hands free in a changing environment. Central banks prefer to decide meeting by meeting, in light of the latest data.

Overall, over the year, the central bank had appreciably reduced the official price of money within a few months, in step with more contained inflation and weaker activity than is desirable. The underlying message was that the priority was shifting from fighting inflation to sustaining growth.

Oxygen for families

A year of cuts gave some oxygen back to families and companies. Euribor ended the year well below its 2023 peak, and payments on variable-rate mortgages and other loans were easing as reviews came round. For anyone with variable-rate debt, that relief was noticeable in the monthly budget. In many households, that difference shows in the capacity to save or to meet other expenses.

The relief, however, is not uniform. It depends on the review date of each loan and the margin paid, and does not reach those on fixed rates until they renegotiate. And for those with savings, the other side of the cuts is a lower return on deposits and accounts. The same fact has different effects depending on each person’s position. It is therefore best to avoid generalisations and look at one’s own situation.

What to review

The end of the year is a good moment to go over the family and business budget, the terms of debt and where cash is held. It is worth doing so without taking the 2025 cuts for granted, as they would depend on how inflation and growth evolved. Planning at current rates, and treating any future cut as an additional margin, is the most prudent option.

A useful year-end review includes comparing what was planned with what happened, noting next year’s maturities and deciding what part of liquidity is reserve, what part has a planned use and what part could have another. Doing it with an adviser helps avoid being carried away by either optimism or pessimism, and starts the year with a clear plan. And remember that a good close also includes the year’s tax and accounting documentation.

Closing the year with clear numbers helps start the next one with a margin.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.