Small spenders. The European Central Bank is fighting on a new front. After two years of battling inflation, President Christine Lagarde and her colleagues must worry about weak growth. Cutting interest rates, as they did on Thursday, helps. But since households save a large share of their income, only a steady stream of cuts can boost the consumption-led recovery that Lagarde hopes for.
The ECB’s decision to lower The benchmark deposit rate was expected to rise to 3.5% from 3.75%. The question is what happens next. At Thursday’s press conference, Lagarde declined to outline the future path of interest rates, but the economic data are clear. Inflation is likely to rise. converge The ECB is moving towards its 2% target next year. Now, however, Frankfurt authorities must ensure that their 10 rate hikes in 2022 and 2023, which took rates to a record 4%, do not tip the eurozone economy into recession.
It’s a thin line: the block GDP expanded by just 0.2% in the second quarter of 2024. The ECB predicts a big jump in growth to 1.3% next year and 1.5% in 2026 driven by a “consumption-led recovery.” That seems unlikely. The savings rate – the percentage of income that people save – stands at a hefty 15.4%. Excluding the abnormal pandemic years, that’s the highest level since at least 2015. In the United States, households bran only 2.9% of its income in July.
And Europeans’ wallets may soon be squeezed even tighter, making them even less likely to spend. The rise in negotiated wages, which cover around 80% of the bloc’s employees, slowed down In the second quarter, the interest rate stood at 3.6%, down from 4.7% three months earlier. And almost a third of eurozone consumer loans will reset to a higher rate within a year as bargains from lower borrowing costs dry up. In Italy and Spain, the share of loans affected could reach almost 70%, according to BCA Research.
Lagarde expressed concern about weak consumption but also promised to keep monetary policy “sufficiently tight” to quell inflation. That’s out of step with what traders are pricing in. Markets expect the deposit rate to be around 2% in September 2025, according to derivatives prices compiled by LSEG. That implies the central bank will cut rates by 0.25 percentage points in six of the next eight meetings. To get people spending, Lagarde will probably need to act faster than that. If she delays, any hopes of a consumption-led recovery and the euro zone avoiding recession will quickly fade.
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.