Interest rates could fall again by the end of the year

The European Central Bank says that disinflation is on track, but there are still risks. Even so, the successive cuts this year have already helped some families.
Interest rates have already fallen 75 basis points and could reach 100.

For the third time this year and the second in a row, the European Central Bank has once again cut interest rates by 25 basis points. This decision was made in light of the improvement in inflation, which in September was below 2%. This is yet another decision by the ECB to help families. "These decreases are favorable to the relief in housing loan installments for Portuguese families whose credit contracts are indexed to Euribor. However, Euribor rates have already discounted part of this fall, but it is likely that they will maintain their downward trajectory,” Paulo Monteiro Rosa, senior economist at Banco Carregosa, explained to Nascer do SOL.

Asked if this year of several cuts was enough for the Portuguese to breathe a sigh of relief, especially for those with mortgage loans, the economist believes that "the decision is worth more for reinforcing the ECB's downward trend in interest rates than for its size of 25 points”, adding that, "despite the fact that this is an insignificant cut from 3.50% to 3.25%, of only 25 basis points, a large part of which has already been discounted by the Euribor, the most important thing is the marked downward trend over the next few quarters, with a gradual easing of mortgage payments expected over the coming months and throughout 2025.”

Another cut by the end of the year.
After yet another cut, the institution led by Christine Lagarde may do so again by the end of the year. "The market anticipates a further cut of 25 basis points at the ECB's next and final meeting in 2024, on December 12, with a 91% probability of this cut materializing, with the ECB's deposit rate closing the year at 3%, resulting in a cut of 100 basis points in the current year of 2024,” says Paulo Monteiro Rosa.

He explains that Thursday's cut was expected. "Four months ago, the ECB's [deposit] rate was 4%, and the Eurozone's central bank cut interest rates for the first time in five years on June 6, beginning a new cycle of expansionary monetary policy.”

At the meeting on September 12, says the economist, "there was more or less a consensus among the members of the ECB to maintain interest rates” at this Thursday's meeting, "but the rapid deterioration of the economy of the single currency, especially the German economy, on its way to a second consecutive year of recession, and the notable slowdown in inflation, especially German consumer prices, have shifted the discourse of ECB members towards a more dovish stance (more concerted with interest rate cuts) in recent weeks, paving the way for today's fundamental 25-point cut in an attempt to recover a rapidly deteriorating European economy.”

Christine Lagarde assumed that the disinflation process is "well underway”.

What the ECB says
The European Central Bank explains that the process of "disinflation is well underway”, which has justified these constant decreases in 2024. However, it also warns about financing conditions, which "remain restrictive”. And he left another warning: "Inflation is expected to rise in the coming months, before falling back towards the target over the course of next year. Domestic inflation remains high, as wages continue to rise at a high rate. At the same time, pressures on labor costs should continue to ease gradually, with profits partially cushioning their impact on inflation.”

It should be remembered that the three main interest rates have been reduced. Consequently, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be reduced to 3.25%, 3.40% and 3.65% respectively, with effect from October 23rd. 

The savings problem
While the drop in interest rates is good news for those who are going to buy a house or have a mortgage, the same cannot be said for those who have savings. Paulo Monteiro Rosa, senior economist at Banco Carregosa, has no doubts: "A drop in interest rates by the ECB implies a drop in the return on term deposits, but do treasury bonds tend to appreciate in an environment of falling interest rates?”, he tells Nascer do SOL. And he argues that the Portuguese need to be more financially literate, "and should also allocate their savings to financial instruments other than traditional term deposits”. The economist also believes that the Portuguese "should diversify their savings more and channel more and more of their money into the capital markets”.