Favorable credit: who benefits from the EB’s rate cut
The EB has surprisingly lowered the key interest rate for the dollar from 1.50 to 1.25 percent pa. As a result, loans could become cheaper. An automatism is not that. Especially in the private customer business the comparison of the realized conditions is more important than the interest level.
The interest rate cut affects variable rate loans.
Disbursements and call loans should be slightly cheaper – for new and existing customers. But miracles are not to be expected. If the average interest rate for credit lines drops by more than 10 basis points as a result of the rate cut, that would be a surprise. Anyone who has overdrawn his checking account should therefore not postpone an always advantageous rescheduling under the pretext of lowering the interest rate.
Beneficiaries may also benefit from installment loans with a maximum term of 24 months. The key interest rate only has a maximum effect of 12 months on the refinancing of loans. Therefore, the effect fizzles with increasing maturity. If you need a installment loan with one to two years repayment period, you should wait two to three weeks then the interest rate cut has arrived at the conditions for end customers.
Especially with small loans to about 3000 usd, however, there are many bargains and special offers that offer banks for new customers. Here, the interest rate cut plays a minor role.
The rate cut will have little or no effect on the terms of long-term installment loans.
This also applies to real estate financing with fixed interest rates. For these loans, the long-term interest rate is the main factor. But it is quite possible that Mario Draghi will intervene at the long end and press interest rates.
The EB can influence long-term interest rates via the bond market and has already done so under Jean-Claude Trichet. It buys bonds on the secondary market and thus drives their prices upwards. Rising prices in bonds are synonymous with falling yields, which also applies to the yields of newly issued bonds. In this way, the refinancing costs for banks can be reduced, so that loans are cheaper even with longer term.
There are some indications that Mario Draghi will be less restrained in his monetary policy and intervention in the secondary market than his predecessor. In the first three days of his tenure, he is already responsible for bond purchases (mainly Italian and Spanish securities) and a rate cut despite strong inflation. This is a strong signal in the symbolic communication policy of the central bank.