Mortgages, debt, deposits and bonds: what changes with the ECB rate cut

John

By John

More credit to families and businesses, cheaper mortgages, savings for the State thanks to the drop in the cost of debt. The ECB’s 25 basis point cut provides a boost to the economy, although the benefits are more visible for those who get into debt: savers, on the other hand, lose out on the remuneration of bank deposits and on the yields of variable rate securities.

Here, point by point, are the main effects of the second 0.25 point cut in the cost of money launched by the ECB, which brings the rate on deposits at the Eurotower to 3.50%.

– LIGHTER MORTGAGES: the reduction in the cost of money has a beneficial effect on bank loan rates, benefiting 3.5 million indebted families who have a home mortgage. Lando Sileoni, secretary general of Fabi, speaks of an “important decision” by the ECB which “for the second consecutive time has anticipated the moves of the American Federal Reserve, whose monetary policy decisions continue to be uncertain. As for the cost of credit, interest on mortgages to families and loans to businesses will fall further in the coming months, so it will become easier to buy a home and make investments”. Fabi estimates an overall saving of over 70 thousand euros (-19.3% on 2023) for those who take out a 25-year mortgage of 200 thousand euros. A breath of fresh air also for those who have a variable rate mortgage, as also confirmed by Mutuionline.it which however underlines how the medium-long term prospects remain unchanged. “The one-month Euribor has fallen to 3.54% from 3.90% at the beginning of the year, but it is still over 100 basis points higher than the Eurirs, which is at its lowest in the last 20 months.” Fixed-rate mortgages therefore remain more convenient. The mortgage market has, however, recorded a significant reduction in variable rates in recent months: in May the average Tan for variable mortgages was 5.08%, while in August it fell to 4.64%. The average fixed rate, on the other hand, is stable, hovering around 3.20%.

– COST OF DEBT DOWN: With the ECB cut, the interest that the State pays on public debt goes down: the cost of debt had flown from 0.10% to 3.76% with the restrictive cycle of recent years. The Parliamentary Budget Office estimated a saving of three billion this year with a full point of ECB cuts in 2024, and seven billion in 2025. It is more likely that the ECB will reach 0.75 points. The savings for the State coffers will still be considerable and will help in the next budget laws.

– DEPOSITS PAY LESS. For savers, the ECB cut dismantles the higher remuneration of deposits of their savings in banks, where the rate on time deposits has come to almost 3.6% from 0.9% where it was before the monetary tightening of 2022-2023.

– BOND EFFECT. The ECB cut raises bond prices but the yields of variable rate securities, such as CCTs, fall, and falling inflation means thinner coupons for BTP Italia. More marked effects on bonds issued by companies, with impacts also on investments in funds.