ECB cuts rates for the first time in 5 years

The European Central Bank (ECB) has surprised the markets by announcing a cut in its key interest rates for the first time since 2019. This decision marks a major turning point in the institution's monetary policy.

Why this rate cut?

Since July 2022, the ECB had followed a policy of aggressively raising interest rates, with ten consecutive increases to contain inflation linked to the war in Ukraine. Inflation had reached 10.6% in Europe. This figure is well above the ECB's objective of keeping the general rise in prices below 2%.

Since May 2024, inflation has fallen to 2.6%. This is the first time in 2 years that it has been so close to 2%. This improvement has led the ECB to adjust its policy, with the aim of stimulating economic activity without rekindling inflation.

The decision to cut ECB interest rates is designed to...

1. Stimulating borrowing and investment With lower interest rates, more companies and individuals are borrowing, boosting investment and consumption.
2. Supporting the property market Borrowers, particularly those who had opted for a variable rate, will benefit from lower rates, which could revitalise the property sector.
3. Easing the burden of debt for governments With the sharp rise in inflation, many governments have seen the cost of repaying their debt soar.

What impact will mortgage rates have in Luxembourg?

With this cut in key rates, banks borrow money from the ECB at a lower cost. So, in theory, they can pass on these lower costs to borrowers. Interest rates on home loans should therefore fall in Luxembourg. But for the moment, the fall is very limited.

The effect will also vary according to the type of rate chosen:

• The impact on variable rates is direct Variable rates are pegged to Euribor (Euro Interbank Offered Rate), which depends directly on ECB rates. Each rise or fall therefore has an impact on variable rates. Luxembourg borrowers who have opted for a variable rate will see a slight reduction in their monthly repayments.
• Impact may be slower on fixed rates Fixed rates are less reactive to changes in ECB rates. Last autumn and summer, for example, they remained stable despite small rises in ECB rates. With a fixed rate, banks are making a long-term commitment: they wait for the downward trend to be confirmed over the long term before lowering their fixed rates permanently.

What long-term impact will this have on the Luxembourg property market?

If further cuts are agreed in the coming months, they will send a clear signal that the ECB is loosening its monetary policy. In the long term, this could have several consequences:

1. Higher borrowing capacity for buyers With lower rates, borrowers in Luxembourg could borrow more and more easily
2. Property prices set to rise again This would be the direct consequence of a sharp fall in interest rates. With greater borrowing capacity and easier access to credit, sellers would have more offers for their property, and might be tempted to up the ante or sell to the highest bidder, thereby mechanically pushing up average selling prices.

What does this mean for your property project in Luxembourg?

This initial signal could be the first in a long series of successive rate cuts over several years.

• If you are planning to buy a property: it's a good time to buy. Interest rates are still high: you can still negotiate the price of your property at attractive levels. The lower the interest rates, the more difficult it will be to negotiate the price, as more people will be able to buy in Luxembourg again.
• If you wish to sell your property: it could also be the right time. The fall in interest rates, combined with governmental aidsThis is creating a renewed interest in real estate. More and more buyers are making visits and signing compromises, just as the brokers atatHomeFinance have been seeing this since the spring. If you are selling immediately, however, you need to be flexible on your price while being aware of the context in which you are selling (the start of a fall in interest rates).

In conclusion, while 2022 and 2023 could have been a year for a wait-and-see attitude, 2024 is undoubtedly the year for action: the Government's tax incentives, and the beginnings of a fall in interest rates, offer interesting prospects for buyers who will be able to seize the good opportunities that present themselves.