Tag: Interest

The European Central Bank Cuts Interest Rates

Today, for the seventh time since June 2024, the ECB (European Central Bank) cut interest rates by 25 basis points, with the key deposit rate now standing at 2.25%, which according to data released by LSEG (London Stock Exchange Group) was anticipated by 94% of financial markets. Experts suggest that the cut comes amidst global economic and geopolitical uncertainty giving fears to falling economic growth within the Eurozone economies. The decision to cut rates by a 1/4 of 1%, was according to the President of the ECB Christine Lagarde, unanimous, with no member arguing for any other type of cut.

In a statement, President Lagarde advised, “Downside risks to economic growth have increased, with a major escalation in global trade tensions and associated uncertainties, will likely lower euro-area growth by dampening exports, and it may drag down investment and consumption. Deteriorating financial market sentiment could lead to tighter financing conditions”. Earlier this month the ECB was, according to experts, ruminating as to whether or not to hold interest rates, but Donald Trump’s tariffs soon put a stop to that, ensuring a unanimous vote today to cut interest rates.

The policy move to cut interest rates also became more attractive as data revealed that the ECB’s benchmark target rate of inflation of 2% was on the road to being achieved, whilst at the same time falling inflation was given a boost by falling energy costs. However, experts are fearful that potential tariffs of 25% and an all-out Eurozone U.S.A. trade war will banish hopes of revival in the economies of the European Union membership countries. Currently experts are predicting another cut in interest rates at the next ECB meeting in June this year, where the rate will then be held at 2% for the rest of the year. However, ever increasing market volatility has left some analysts suggesting even further cuts in the cost of borrowing after the June announcement.

The ECB also announced that in future they will not be pre-committing to any particular rate path, indeed interest rate decisions will be based on its assessment on the inflation outlook in light of incoming financial and economic data, the dynamics of underlying inflation, and the strength of monetary policy transmissions. As far as the Euro is concerned, the common currency has this month strengthened as investor sentiment has proved less resilient to other economies and more resilient towards the Euro arena. Once again, all eyes are on President Trump and the EU trade negotiating team to see if they can come to an agreeable solution regarding tariffs.

The European Central Bank Cuts Interest Rates March 2025

On Thursday 6th March 2025 and for the sixth time since June 2024, the ECB (European Central Bank) cut interest rates by a ¼ of 1% (25 basis points) to 2.5%. The ECB’s Governing Council released a statement saying, “The disinflation process is well on track, inflation has continued to develop broadly as staff expected, and the latest projections closely align with the previous inflation outlook”. The vote by the governing council was unopposed except for Austria’s Robert Holzmann who abstained. The ECB now sees inflation averaging 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027. 

Experts suggest that the ECB’s thoughts on interest rates is not as clear cut as it was a few weeks ago as there is increased geopolitical uncertainty plus a large fiscal stimulus looming large on the horizon. As President Trump withdraws backing for Ukraine, the President of the European Union, Ursula von der Leyen, suggested that the funds needed to rearm Europe could easily reach as much as Euros 800 Billion. Experts suggest that such an outlay could well have implications for economic expansion, and inflation. 

The President of the ECB noted that the risk to economic expansion was still leaning towards the downside. However, the President pointed out that increased defence spending should give the economy a lift after President Trump turned against Europe and Ukraine leaving the Europeans to drive forward their own defence and that of the Ukraine. The President also went on to say that the ECB would be even more data-dependent and said that they would pause quantitative easing should the data/numbers suggested that was needed in order to hit their inflation target of 2%. 

At their next policy meeting in April, it would appear that bank officials are heading for a showdown over interest rate cuts and are preparing for some difficult negotiations. Interestingly, the doves on the governing council appear to see little reason to pause, whilst the hawks feel they should hold interest rates to study the implications of increased European defence spending and the on-going up-coming geopolitical risks. 

Experts suggest the financial markets are also undecided with traders and investors feeling that the upcoming defence outlays will fan inflation and push economic expansion. One financial expert said that in the Euro bloc there is an expectation of higher growth rates and a slowdown in the disinflationary process. This will reduce the scope for further interest rate cuts at the next meeting of the ECB in April and the rhetoric of President Lagarde shows she is sitting on the fence as to whether or not there will in fact be an interest rate cut. There is also the spectre of tariffs from President Trump which undoubtedly clouds the thinking of officials.

Is the US Government’s Interest on Debt Spiralling out of Control?

In the United States the annual debt interest they pay on Treasury Bills (US Treasuries) has doubled in the last 9 months, and recent figures released shows that debt interest has passed the USD1 Trillion mark as of the end of October 2023. This figure is representative of 15.9% of the entire United States Federal budget for the 2022 fiscal year, which totalled out as USD6.272 Trillion. 

The heavy borrowing coming from Washington DC has driven up bond yields amid worsening metrics, and such borrowing was responsible for the credit agency Fitch to downgrade government debt back in August of this year. The upward shift in interest rates has put the United States government in a position of having to pay more on interest payments in the coming years than was originally calculated.             

Before the Covid-19 Pandemic no one anticipated that interest rates would go so high, and unless interest rates return to their pre-pandemic levels, interest rate debt will spiral out of control. In fact, experts predict that by 2026 the government’s net interest expense may well be 3.3% of Gross Domestic Product (GDP), which will be a new record being the highest ever recorded. 

As an example of how interest rate debt is spiralling out of control, in October 2023, data released showed that circa USD207 Billion in Treasury notes matured, these notes were issued in 2013, 2016, 2018, 2020, and 2021. Calculations carried out by respected analysts show that the weighted average interest rate* was 1.2%. These notes will be replaced by newly issued debt at an average rate of 5%, and the same will happen every month, (though the amounts will differ) for many months to come. 

*Weighted Average Interest Rate – This represents the aggregate rate of interest paid on all debt in a measurement period. The formula for calculating the weighted average interest rate is,

                         Aggregate Interest Payments ÷ Aggregate Debt Outstanding 

                                              = Weighted Average Interest Rate  

However, things may be looking up for the US government as along with the European Central Bank and the Bank of England, the Federal Reserve announced on 2nd November 2003 that it would keep Overnight Federal Funds steady, which is the second consecutive meeting where rates have remained unchanged. Many operators in the financial markets believe that rates will come down in the new year, which will lighten the load on debt interest payments. However, the Chairman of the Federal Reserve warned that if inflation stops declining he reserves the right to increase rates again, thereby increasing the burden on debt interest repayments.