The European Central Bank has reduced the key interest rates for a quarter percent point. The deposit rate relevant to the financial markets is now 2.5 percent. It is the sixth lowering since last summer.
However, the fact that interest rates will be reduced again in April seems to be becoming less likely. The impending trade war with the United States, the planned EUR 800 billion of EU investment program to finance a European defense as well as the avoided increase in government debt in Germany to finance the Bundeswehr and infrastructure make it difficult to predict inflation development and economic growth in the monetary union. “Additional expenses in the defense will boost the economy, but they could also increase inflation,” said ECB President Christine Lagarde on Thursday after the interest decision. A more precise analysis by the ECB is still pending, since the details of timing and financing these huge state loans are not yet known. “We have to understand how this will work. Only then can we draw our conclusions, ”said Lagarde.
In February, inflation in the euro zone was 2.4 percent. In the service sector, prices continue to increase, and wage increases also have an increase in inflation. The ECB wants to achieve an inflation rate of 2.0 percent. Will the interest continue to sink? “The main refinancing interest rate is now relatively just above the inflation rate. Increasing wages and growing government new debt could lead to inflation not falling further, but rather increases again, ”said IFO President Clemens Fuest, who therefore sees hardly any scope for further interest ratings.
The key interest rates in the monetary union have experienced a never seen up and down in recent years. If the deposit rate for monetary policy was still 0.5 percent in 2022, it rose to 4.0 percent by September 2023 before it was gradually reduced to 2.5 percent from June 2024. The roller coaster ride is mirror of the economic upheavals: While deflation threatened in the 2010s, the inflation from 2021 rose shockingly due to the corona pandemic and Russia's invasion of Ukraine.
Germany's new debt could bring inflation
Now the ECB has to decide on the basis of future economic data whether it can further lower the key interest rates this year without promoting another inflation boost. The state debt in the euro zone will increase sharply in view of the recovery, the loan amounts are so high that they could trigger an inflationary impulse. Germany wants to finance 500 billion euros in a special fund to finance the infrastructure projects, at the same time the debt brake for defense spending is to be lifted. As the largest country in the euro zone, these new debts have an impact on the entire currency area. “Although the major financial policy projects of the future government would increase the stagnating economic output over several years,” says Michael Holstein, chief economist at DZ Bank. However, this could go hand in hand with an increase in inflation, driven by higher wages and higher economic demand. If the additional expenses for armor and infrastructure trigger a strong growth impulse, the ECB should not lower the key interest rates too much. The German stock index Dax, which reflects the growth expectations of the investors, marked a record high on Thursday with 23 314 points.
Inflation 2025 higher than previously expected, growth less
In the meantime, the ECB economists screwed their growth forecast downwards, for 2025 to 0.9 percent instead of 1.1 percent so far, as the central bank announced on Thursday. Of course, this forecast has not been able to take into account the latest plans for debt admission in the euro zone. The inflation will also go back more slowly than previously expected. For the current year, the ECB expects an inflation rate of 2.3 percent, in December the central bank had predicted 2.1 percent.
In the worst case, does a debt crisis threaten again?
So far, economists have assumed that the stability of the euro zone is not at risk due to the increasing government debt. In the worst case, however, there could be a new euro state debt crisis after 2011. Then the ECB would be in demand with support purchases, corresponding rescue programs are already on the shelf. Sometimes financial markets withdraw their trust overnight: former British Prime Minister Liz Truss had to experience this. In October 2022, she presented unfinancable tax cutting plans. The British pound broke in, the interest rose, and the Bank of England had to calm down the market with support purchases. Nobody knows when such a tilting point would be reached at the financial markets, but the risk is there, especially since the EU Commission loosened the debt rules of the EU stability package.
Turbulence on the bond markets as last in 1989
The planned massive borrowing of Germany has triggered turbulence worldwide on the financial markets. The returns for ten -year federal bonds rose by 0.3 percentage points in one day. The value was 2.9 percent on Thursday, and at the beginning of the week it was 2.3 percent. Such rashes recently existed according to the fall of the Berlin Wall and the re -reinforcement of Germany. “This is a seismic shift of epic dimensions that starts from Germany, and maybe so far only quick money and nimble investors have reacted to it,” said Jim Reid, market strategist of Deutsche Bank. Investors would have to reorganize their investments in government bonds. Therefore, there could be other returns. This means that it becomes more expensive for Germany to go into debt, but the other euro countries will also have to pay higher interest rates; Thanks to their excellent creditworthiness, federal bonds have always been forming the anchor for loan rates in the monetary union. As a result of the price shifts for German government bonds, credit risks have been re -assessed worldwide, the return of ten -year -old Japanese government bonds noted at its highest level since 2009.
