The European Central Bank (ECB) may not reduce interest rates as much as previously forecast this year, predicted SEB Bank’s Head of Savings, Investments, and Pension Offerings, Oļegs Andrejevs, in an interview with LETA.
On Thursday, the 6th of March, the ECB announced a 0.25 percentage point cut in interest rates, setting the overnight deposit rate at 2.5%. While this reduction was expected, the outlook for future ECB moves remains uncertain, Andrejevs noted.
He pointed out that the global economy has faced multiple challenges recently, including growing instability and the introduction of trade tariffs. At the same time, European Union (EU) governments are increasing spending on defence and infrastructure, which will stimulate overall economic demand.
According to Andrejevs, this increased spending will boost economic activity but may also contribute to rising prices.
He explained that, after a total reduction of 1.5 percentage points, the ECB believes its monetary policy is no longer as restrictive and can now provide stimulus to the economy. However, uncertainty remains because the ECB’s latest forecasts may not fully account for recently announced German and EU defence and infrastructure spending. As a result, economic conditions in the coming months could evolve differently than currently projected.
The expert points out that for borrowers, loan interest payments are expected to continue declining as rates are likely to fall further. However, savers should be aware that interest rates on savings accounts and term deposits will gradually decrease, leading to lower returns. Meanwhile, lower interest rates and recently announced EU security spending could support economic growth and push stock prices higher.
Andrejevs also noted that cheaper loans could boost economic activity, but prices in stores may still continue to rise.
Market participants increasingly believe that future rate cuts will be more modest than previously anticipated, Andrejevs said. For example, a month ago, the market expected the overnight deposit rate to fall to 1.85% this year, but now the forecast suggests it may “settle” around 2%.
He explained that this could mean a more stable euro value, but EURIBOR may not drop below 2% by the end of the year as previously expected. Therefore, both individuals and businesses should prepare for borrowing costs to decrease, but not as significantly as some had hoped.
As previously reported, on Thursday the ECB decided to cut interest rates by 0.25 percentage points. The overnight deposit facility rate was reduced to 2.5%, the main refinancing operations rate was lowered to 2.65%, and the overnight lending facility rate was set at 2.9%.
The new rates will take effect on the 12th of March.