The ECB Governing Council lowered the three key interest rates by 25 basis points in its monetary policy meeting in Ljubljana, 17th October 2024, setting the scene for lower mortgage borrowing costs in the Eurozone, including Spain.
This decision was driven by an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. The cut will take effect from the 23rd of October and follows two previous reductions already this year (12-Jun & 18-Sep, both 25 basis points, meaning a total of 75 basis points so far this year).
Key ECB interest rates effective 23/10/2024
- Deposit Facility: 3.25
- MRO: 3.40
- Marginal lending facility: 3.65
What it means for mortgage borrowing costs in Spain
If the European Central Bank (ECB) lowers both the Deposit Facility Rate and the Main Refinancing Operation (MRO) Rate, we would expect EURIBOR to generally follow and decrease as well.
EURIBOR latest
EURIBOR declined to 2.936 in September, a year-on-year decline of 29pc, and month-on-month decline of 7pc. EURIBOR is currently on a downward trend, meaning that mortgage borrowing is getting cheaper for those who qualify for a Spanish mortgage loan. It does not mean that banks are loosening their lending standards.
EURIBOR is currently below the ECB’s MRO rate, which indicates that banks can borrow at cheaper rates in the interbank market than from the central bank, usually due to excess liquidity or low credit risk perceptions. It can also suggest that banks are less reliant on the ECB for funding and that there is ample liquidity available in the system. This scenario typically reflects a broader trend of accommodative monetary policy and a well-functioning interbank market.
Main Themes of the ECB’s monetary policy statement and press conference:
This summary is based on the ECB’s press conference statement.
- Disinflationary Process Well on Track: The ECB expressed confidence in the ongoing disinflationary process. Inflation fell to 1.7% in September, its lowest level since April 2021. Energy prices dropped sharply, while food price inflation rose slightly. Most measures of underlying inflation either declined or remained unchanged. The ECB expects inflation to rise in the coming months due to base effects before declining to target in the course of next year.
- “The incoming information on inflation shows that the disinflationary process is well on track.” – Christine Lagarde
- Economic Activity Weaker Than Expected: Incoming data suggest that economic activity has been weaker than expected. Manufacturing continues to contract, services growth is sluggish, and businesses are expanding investment slowly. Household consumption decreased despite rising incomes in the second quarter. However, the labour market remains resilient, with the unemployment rate holding steady at 6.4%.
- “The incoming information suggests that economic activity has been somewhat weaker than expected…Businesses are expanding their investment only slowly, while housing investment continues to fall.” – Christine Lagarde
- Data-Dependent Approach Reaffirmed: The ECB reiterated its commitment to a data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of restriction. The Governing Council will continue to assess the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission in making future rate decisions.
- “We are not pre-committing to a particular rate path.” – Christine Lagarde
- Risks to Economic Growth Tilted to the Downside: The ECB acknowledges downside risks to economic growth. Lower confidence could hinder consumption and investment recovery. Geopolitical risks, including the war in Ukraine and the conflict in the Middle East, could disrupt energy supplies and global trade. Stronger than expected lagged effects of monetary policy tightening are also a concern.
- “The risks to economic growth remain tilted to the downside…This could be amplified by sources of geopolitical risk, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, which could also disrupt energy supplies and global trade.” – Christine Lagarde
- Fiscal and Structural Policies for a Stronger Economy: The ECB emphasised the importance of fiscal and structural policies in supporting economic productivity, competitiveness, and resilience. These policies can contribute to raising potential growth and reducing price pressures in the medium term.
- “Fiscal and structural policies should be aimed at making the economy more productive, competitive and resilient. That would help to raise potential growth and reduce price pressures in the medium term.” – Christine Lagarde
Other Key Points:
- Restrictive Stance Maintained: Despite the rate cut, the ECB maintains that its monetary policy stance remains restrictive and will continue to be so until inflation is confidently projected to return to the 2% target sustainably in the medium term.
- No Recession Foreseen: The ECB does not currently anticipate a recession in the Euro area, despite worrying data from Germany.
- Trade Tensions and Geopolitical Concerns: The ECB highlights trade tensions and geopolitical uncertainties, including the potential for renewed US tariffs and the impact of the Middle East conflict on oil prices, as downside risks to economic growth and potential drivers of inflation.
Overall: The ECB’s decision to cut rates reflects growing confidence in the disinflationary process, but also acknowledges concerns about weakening economic activity. The central bank remains committed to its data-dependent approach and will continue to carefully monitor economic developments and adjust its monetary policy stance as necessary to ensure price stability.
