Rewrite of the original content about ECB rate cuts and their impact on mortgages, credit, bonds, stocks, savings, the euro, and the broader economy

After eight years without changes, interest-rate declines begin to show. This move by the European Central Bank (ECB) is notable because it hasn’t happened since March 2016, when the policy rate was cut from 0.05% to 0%. It stayed there until July 2022, when a cycle of rate hikes started, reaching 4.50% in September of the previous year. The effects of such a policy reach far beyond macro indicators; they touch households directly, influencing mortgage payments and overall economic growth alike.

1. Mortgage loans

The Euribor, the benchmark for most variable-rate mortgages, closely follows the ECB’s policy rate. In light of expectations for an initial rate cut at the June meeting, the 12-month Euribor—also used by banks for interbank lending—registered a first decline in mortgage payments in April and is expected to ease further in May. It currently averages around 3.68%, below the level from a year earlier at 3.862%. The trajectory depends on how policy rates evolve. If Euribor remains under 4%, mortgage costs should continue to drop at least until November, as monthly averages from a year ago remain above that level. If there are further rate reductions, the declines will become more pronounced.

2. Credit

Reducing policy rates does more than lower mortgage costs; it makes borrowing cheaper for households and businesses alike, stimulating investment and consumer lending. Data from the Banco de España shows the average rate on new consumer credit rose to 7.92% in April, up from 7.78% in March. Loans for purposes other than housing averaged 5.64%, slightly down from 5.68% the prior month. These figures highlight how monetary policy influences the broader credit landscape, shaping how families finance purchases and how companies fund expansion.

3. Bonds and bills

There is a direct link between fixed-income markets and interest-rate movements. When rates fall, the present value of a bond’s future cash flows increases, lifting bond prices and portfolio values, as noted by market observers. Since new bonds pay lower yields, holders of existing issues tend to retain them unless offered equivalent returns. Consequently, a rise in prices benefits fixed-income funds. Short-term yields, especially for six-month bills, respond first to rate expectations, while longer maturities reflect market forecasts. Recent auctions showed six-month bills yielding around 3.367%, marking the first time savers renew bills at a return below the year-ago level.

4. The stock market

When rates are high, equities often lose appeal because investors can lock in solid returns with less risk than stock swings. A rate cut can reverse that dynamic: cheaper new debt means higher corporate profits, which tend to lift stock prices. The Ibex 35, a key Spanish index, has risen since January by more than 11%, with the market watching how quickly future rate cuts are priced in. If the pace of reductions slows, gains may stall; if cuts continue, broader equity gains could persist.

5. Savings

A potential downside of lower rates is the diminished appeal of conservative savings vehicles like current accounts and time deposits. During the period of monetary tightening that began in July 2022 and ended last year, banks dragged their feet, keeping returns on passive funds relatively low, though there were exceptions among smaller institutions. The Banco de España notes that the average rate on overnight deposits stood at 0.18% in April, down slightly from March. One-year deposits averaged 2.48%, up marginally from 2.43%. Rates for deposits between one and two years hovered around 2.98%, and those exceeding two years stood near 1.05%, down from 1.71% the previous month. These trends illustrate how savings reallocate when borrowing costs shift, prompting savers to reassess risk and liquidity preferences.

6. The euro

Lowering the price of money generally leads to a weaker euro against other currencies like the dollar. For exporters and companies operating in dollars or dollar-denominated markets, this depreciation enhances competitiveness. For travelers, however, it can make international trips more expensive, reducing the amount of foreign currency earned per euro. The euro’s exchange rate has eased from roughly 1.11 dollars earlier in the year to around 1.088 dollars at present, influencing pricing and margins across sectors with international exposure.

7. The economy

Broadly speaking, rate cuts tend to energize the economy. The reduction in financing costs improves access to credit for families and businesses, encouraging spending, investment, and job creation. As lenders face lower default risk on loans, overall economic activity tends to strengthen. The path of future rate moves continues to shape the pace of growth, employment, and financial stability across households and firms alike.