The European Central Bank suspended the hike for the first time after 10 consecutive increases. According to President Lagarde, interest rates may have peaked. What kind of strategy should depositors take now?
In view of the weak economy and declining inflation data, the ECB decided to suspend its intervention in key interest rates at its interest rate meeting in Athens. This was the first suspension after 10 consecutive increases. Inflation has recently “deeply declined”. The ECB stated that the previous hike would also continue to have a significant impact on the financing situation. Demand for credit continues to be suppressed, leading to lower inflation. The economic outlook for the euro area is bleak. In Athens, Lagarde said: “The European economy may weaken for the rest of the year.” The euro interest rate may have peaked.
The rate of interest on deposits related to financial markets remained at 4 per cent. This is the highest deposit rate since the establishment of the euro mechanism in 1999.
The possibility of a reduction in interest rates
Observers and financial markets continue to debate whether interest rates will fall next year or whether key interest rates will remain high over the longer term.
The previous market anticipated a two-time reduction in interest rates next year. By the end of the year, interest rates could be reduced by half a percentage point. In response to these discussions, Lagarde said, “There is no discussion of the reduction of interest rates, and such a debate is absolutely premature”.
The chief economist of commercial banks in Germany, Jörg Krämer, stated: “The ECB again stated at today's press conference that there would be no further increase in key interest rates. But we do not share the market's view that the ECB will again reduce interest rates significantly next year.” He warned that this was certainly a risk because, given the potential for inflation, the 4 per cent deposit rate was not very high.”
The VP Chief Economist, Thomas Gitzel, assessed the situation differently. In his view, inflation could decline further in the coming months and economic development would remain difficult. He said, "There will be a first reduction next year."
Jefferies, the European chief economist, Mohit Kumar, shares the same view. He said, “We continue to believe that the ECB will not further raise interest rates, and that the first reduction could be in the third quarter of 2024.”
Response of savings users
It would have been expected that high interest rates would have been maintained for a considerable period of time for depositors to place funds in demand accounts or in demand fund ETF. The best current savings rate is about 4 per cent. For example, Xtrackers II euro overnight interest rate swaps (WKN:DBX0A2) or Lyxor smart overnight return ETF (WKN:LYX047). But if key interest rates are lowered, the return on the currency market ETF will automatically decline. Reservers who already plan to benefit from interest should not invest in current currency products, but in longer-term vouchers. For example, term deposits, Amundi Prime Euro Government Bonds 0-1Y ETF (WKN:A2QEUJ) have a maximum duration of one year.
If a guaranteed investment is planned for December 2025, the corresponding periodic ETF could also be considered. For example, iShares iBunds Dec 2025 Term € Corp ETF (WKN:A3EGL) invests funds in corporate bonds that mature at the end of 2025. Funds could be recovered by the end of 2025. The advantage of this fund is that, whatever the central bank ' s next step, it now has a fixed return of 4 per cent.