In September 2024, key central banks such as the European Central Bank (ECB) and the US Federal Reserve (Fed) have cut their interest rates in response to the economic slowdown and falling inflation. These cuts are intended to boost growth, especially in economies that have shown signs of stagnation.

Context: Why are interest rates being cut?

Since 2022, central banks have maintained tight monetary policies to control inflation. However, with inflation under control in 2024, the ECB and the Fed have decided to cut interest rates. The ECB lowered its refinancing rate to 3.65% in September, while the Fed is also expected to follow the same path【source: see more in central bank announcements】.

Direct Impacts of Interest Rate Reduction

1. Greater access to credit and stimulus to consumption: Lower rates make it easier to borrow, encouraging both consumers and businesses to spend and invest more. This is crucial for economies such as the Eurozone, which has experienced moderate growth.

2. Optimism in financial markets: Lower interest rates reduce financing costs for companies, which generally boosts stock markets. Investors seek better returns on riskier assets, such as stocks, as bond yields fall.

3. Weaker currencies and export competitiveness: Lower rates tend to weaken national currencies, making exports more competitive by being cheaper in international markets, although this also makes imports more expensive.

4. Relief on debt costs: For those with variable rate loans, lower rates mean reduced payments, which can ease financial pressure on households and businesses.

Risks and Challenges of Monetary Easing

1. Potential asset bubbles: Cheap access to credit can encourage speculation in real estate and financial markets, increasing the risk of asset bubbles that could burst if economic conditions change.

2. Renewed inflation: Although inflation has decreased, central banks must be cautious not to generate a new inflationary cycle by injecting too much liquidity into the economy.

3. Prolonged weakness in private consumption: Despite low rates, consumers and businesses could remain cautious if economic uncertainty persists, reducing the positive effect of lower rates on consumption.

What Can We Expect in the Future?

As central banks continue to ease monetary policy, we are likely to see further rate cuts in the remainder of 2024 and into 2025. However, banks must carefully manage the balance between stimulating economic growth and maintaining long-term financial stability.

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My personal experience with finance: Since 2019, I have been immersed in the world of investing, and I have observed first-hand how changes in interest rates affect markets. Market reactions are not always immediate; sometimes, expectations are already priced in before changes are announced, while other times, markets adjust after the announcement. In addition, these changes can create volatility, highlighting the importance of exercising caution and staying informed of macroeconomic data before making investment decisions.