As anticipated, last Thursday, the ECB cut official interest rates by 0.25%. The interest rate on the deposit facility was lowered from 3.25% to 3%.
The decision marks the fourth consecutive rate cut this year, as the ECB continues its efforts to steer inflation towards its 2% medium-term target, while addressing concerns about the eurozone’s ongoing economic weakness.
According to the central bank’s statement, the “disinflation process is on track.” The central bank forecast inflation of 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027. This means it should be converging to its long-term target of 2%.
However, it must be said that the battle against inflation is not completely won. Core inflation, which excludes energy and food, is expected to stand at 2.9% in 2024, and services inflation is expected to remain elevated. In addition, Europe remains exposed to supply-side shocks, as in the case of rising energy prices.
Although its sole mandate is price stability, the ECB also looks at the state of the economy, which is quite weak at the moment.
The crisis in the automotive industry has erupted in Germany, highlighting production overcapacity in the face of stagnating demand and weak competitiveness in the electric vehicle sector. At the same time, luxury brands have suffered from weak consumption in the crucial Chinese export market. In addition, political instability, especially in France, is causing new concerns.
For the coming year, the market expects further rate cuts totaling 1.25%. Long-term equilibrium rates, according to market participants, currently stand at around 2%, but this is only a theoretical level and many factors could change.
In particular, the impacts of Trump’s policies on the European economy will have to be verified. Possible tariffs on European products could further slow down the continent’s economy, but it is also possible that European countries will push for more expansionary fiscal policies to support production and industrial demand.
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ToggleThe Yield (Variable) of our Euro Savings Portfolios falls to 2.60%.
Our savings portfolios offer a return that accumulates at the same rate as the official rates minus costs: that is why we call it variable Yield (Internal Rate of Return). The previous (variable) Yield was 2.85%. After the cut, it will drop to 2.60% for the lowest level of capital, as we calculate the variable Yield of the Savings Portfolio as of 12/19/2024. You can see the Yield depending on the volume of the account, which can increase to 2.78% according to the table below:
Yield (variable) according to amount invested
Yield (net) / Portfolio amount up to | €499 999 | €999 999 | €4 999 999 | > € 5 000 000 |
Euro Savings Portfolio as of 12/19/2024 | 2.60% | 2.65% | 2.75% | 2.78% |
Important note: At the time of writing, 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’ portfolios still have returns linked to the previous rates. We have always acted prudently in communication related to the calculation of the variable effective IRR. In cases of increases, we have not announced the change until it is actually reflected. For decreases, we prefer to be cautious and announce the decrease in advance, even if it is not yet fully reflected in the money funds used, in anticipation of what will happen in a few days.
Recall that this is the Yield (variable) that can reasonably be expected to be obtained in one 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 accrue at a slightly lower rate. As we have repeatedly published, the Yield on our Savings Portfolio remains one of the most competitive returns you can find for your immediate savings or emergency fund. Historically, our Euro Savings Portfolio has had an average return almost 1.5% higher than deposit rates, as shown in the graph below. This difference was 0.64% at the latest available data from the Bank of Spain (October 2024).
Target portfolios: fixed target return of up to 11% (Yield 3.0%)
At inbestMe the only portfolio focused on immediate savings or emergency fund is the Savings Portfolio, due to its flexibility and low risk.
For savings that you can invest and commit to a predetermined term, at inbestMe we offer the Target Portfolios with maturities 12/2025, 12/2026, 12/2027, 11/2028 and 12/2028. With a target portfolio, you can achieve a cumulative target return of up to 11% and target annualized returns of up to 3.0% in EUR*. If you consider them, make sure that you are convinced beforehand that you do not need the money until that maturity (although the withdrawal is flexible, before maturity you may not get the target return). A target portfolio is especially useful for investors who have a defined goal within the next few years. Suppose you require 100,000 euros to buy a house in 4 years. In this case, it would be very useful to have reasonable certainty about the return you will get from your portfolio to make sure that this 100,000 euros will be available when you require it. It would not be advisable to invest all the money in stocks, as a stock portfolio can fluctuate a lot over time. It would be better to have a target portfolio, where the return can be known in advance. This option would also be more suitable than a traditional bond portfolio, where the return can fluctuate over time. It may even be safer than a savings portfolio, as the Yield of the portfolio is unknown going forward. In the case of a savings portfolio, you would never lose from a negative change in principle, but you would never lose from a negative change in principle.
Bond portfolios (Yield up to 3.8%)
If your investment horizon is still short or medium term, but more indeterminate, this year we have also launched our Bond Portfolios, with Yields reaching up to 3.8% in EUR* for the aggressive bond portfolio.
*Important note: these target returns or Yields are the latest calculated as of 11/30/2024 and are subject to change. More details can be found in the corresponding pages of each portfolio.
Currently, for some investors, given the declining returns of the Savings Portfolios, these options may be more tempting and make more sense, as what is known as the yield curve has steepened a lot over the last few months (see chart below) and, as mentioned above, the ECB is expected to continue to aggressively lower official rates through 2025.
Source: TradingView