ECB lowers official interest rates by 0.25%.

In a highly anticipated decision, on Thursday, the ECB cut official interest rates by 0.25%. The deposit facility rate now stands at 3.25%, down from the previous 3.50%.

Inflation in the eurozone is at 1.7%, below the ECB’s target of 2%, indicating that the disinflation process is ongoing, although a rebound is expected in the coming months due to base effects on energy prices.

The ECB’s decision was also influenced by the economic slowdown in Europe. Manufacturing activity has continued to contract, while the services sector grew during the summer, likely driven by tourism, but this growth is expected to diminish. Generally, central banks lower interest rates when the economy slows down to reduce the financing costs for households and businesses, thereby stimulating economic activity.

Real incomes in Europe have increased, but contrary to expectations, households have reduced their consumption. The savings rate has risen to 15.7%, compared to a pre-pandemic average of 12.9%. People have saved more and consumed less. Lower interest rates should also reduce the incentive for people to save.

Thus, while the ECB does not have an explicit mandate regarding economic growth, it is currently focused on the weakening of activity caused by an export-based model and the availability of cheap energy. The weakness in China and geopolitical tensions are likely to continue weighing on European exports.

The variable yield (TIR) of our Euro Savings Portfolios drops to 2.85%

Our savings portfolios offer a yield that accumulates at the same rate as the official rates minus costs: that’s why we call it variable yield (Internal Rate of Return). The previous variable yield was 3.10%. After the cut, it will drop to 2.85% for the lowest capital level, as we calculate the variable yield of the Savings Portfolio from 23/10/2024. You can see the yield according to the account volume, which can increase up to 3.03% according to the following table:

Euro Savings Portfolio from 23/10/2024:

Net Yield / Portfolio Amount Up To	€    499 999	€    999 999	€ 4 999 999	>5000000
Euro Savings Portfolio from 23/10/2024	2.85%	2.90%	3%	3.03%

Important note: At the time of writing this article, the 0.25% reduction has not yet been reflected in the money market funds used in our portfolio. This is because some assets in the funds’ portfolio still have yields linked to the previous rates. We have always acted with caution in communication related to the calculation of the effective variable yield. In cases of increases, we have not announced the change until it is effectively reflected. Regarding reductions, we prefer to be cautious and announce the decrease in advance, even if it is not yet fully reflected in the money market funds used, anticipating what will happen in a few days.

Let us remember that this is the variable yield that can reasonably be expected to be obtained in a year if rates remain at this level. There are no other adverse effects on the value of the portfolio. The only change is that interest will now accumulate at a slightly lower rate. As we have repeatedly published, the yield of our Savings Portfolio remains one of the most competitive remunerations you can find for your immediate savings or emergency fund. Historically, our Euro Savings Portfolio has had an average return almost 1% higher than the interest rates on deposits, as observed in the following graph. This difference was 0.84% in the last available data from the Bank of Spain (August 2024).

Target Portfolios (TIR 3.15%) and Bond Portfolios (up to 3.73%)

At inbestMe, the only portfolio focused on immediate savings or the emergency fund is the Savings Portfolio due to its flexibility and low risk.

For the savings that you can invest and commit for a predetermined term, at inbestMe, we launched a few months ago Target Portfolios with maturities of 12/2025, 04/2026, 12/2026, and 12/2027, with target yields of up to 3.15%*. If you consider them, make sure beforehand that you are convinced you won’t need the money until that maturity (although withdrawals are flexible, before maturity you may not achieve the target yield).

If your investment term remains short or medium term but is more uncertain, we have recently strengthened our Bond Portfolios, with yields reaching up to 3.73%* for the aggressive bond portfolio.

*Important note: these target yields or TIRs are the latest calculated on 15/10/2024 and are subject to change. On the pages corresponding to each portfolio, you can see more details.

Currently, for some investors, given the decrease in the yield of the Savings Portfolios, these options may be more tempting and make more sense, as what is known as the yield curve has steepened significantly over the past few weeks (see the following graph).

Source: TradingView