The financial markets, economy and consumers are eagerly awaiting the Governing Council meeting of the European Central Bank (ECB) on 6 June. The reason: the ECB’s interest rate decisions have far-reaching implications for the German and eurozone economies. ‘Inflation currently allows for a moderate reduction in interest rates,’ says Reinhard Grawe, Director of Risk Germany at the international credit insurer Atradius. The market analysts at Atradius expect a reduction in key interest rates of 25 or at most 50 basis points at the June meeting. The most important key interest rate of the European Central Bank currently stands at 4.5 per cent.
As the interest rate cut is generally expected, Atradius estimates that the impact on the financial markets will be rather low. Especially as the ECB had already hinted at possible interest rate cuts in June at its last council meeting in April. If the new assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission by the ECB Governing Council further strengthen confidence in a sustainable convergence of inflation towards the target, it would be appropriate to reduce the current level of monetary policy restrictions, the ECB said in April.
However, if the ECB were to maintain the current interest rate, this could have a negative impact on the stock markets. However, the credit insurer Atradius assumes that the ECB will act cautiously. If key interest rates are cut by 25 or at most 50 basis points in June, the impact on gross domestic product (GDP) would be between 0.2 per cent and 0.4 per cent after two years according to the ECB’s models.
Which sectors would benefit from an interest rate cut
According to the Atradius manager, the current inflation trend currently allows for a moderate reduction in interest rates. In view of the sluggish German economy, however, this reduction is likely to provide moderate relief at best. ‘The ECB’s next move will not trigger a boom,’ says Reinhard Grawe, dampening expectations. The construction industry, for example, will not yet benefit from a one-off, moderate interest rate cut, meaning that construction investment will remain at a low level in 2024. ‘Only a more sustained interest rate cut will have a noticeable effect on construction investment.’
According to him, the situation in mechanical engineering could improve as a result of an interest rate cut. However, it will be much more decisive whether the heavily export-orientated sector can hope for stronger foreign demand for high-tech products from Germany again. The capital goods industry could benefit from lower interest rates, as the cost of investment financing would fall, making investments in new machinery and equipment more attractive. According to Reinhard Grawe, a reduction in interest rates would help highly indebted companies across all sectors, particularly private equity firms in the industrial sector, as they often have high liabilities and would benefit accordingly from a reduction in interest rates.
Hardly any impact on the consumer sector
According to Atradius, consumption in Germany will be stimulated less by the potential interest rate cut than by the significant fall in inflation. The credit insurer therefore assumes that consumer spending will increase slightly this year. However, in many consumer-related sectors, such as the fashion industry, this will not be enough to return to calmer waters.
If, contrary to expectations, interest rates are not lowered, the risks will continue to increase, particularly in the construction sector, in individual segments of the consumer goods sector and in mechanical engineering. In contrast, liquidity and insolvency risks in the food sector and in the travel sector, for example, remained low
