The ECB lowers rates by 0.25%, the yield of the Savings Portfolio to 3.35%

The ECB cuts rates by 0.25%.

After nine months of holding policy rates steady and as expected, the European Central Bank (ECB) cut rates by 0.25% at its June 6, 2024, meeting. Christine Lagarde had practically committed herself in advance to such a cut.

Why was an interest rate cut decided now?

The decision was made on the basis that, compared to nine months ago, inflation has fallen by more than 2.5% and the inflation outlook has improved. Typically, the ECB raises interest rates to slow the economy and contain inflation. Now the ECB believes that part of the job of containing inflation is done and that interest rates can be lowered a little to avoid damaging the economy.

What are the rate forecasts for the future?

The battle against inflation is not yet completely won. The central bank revised inflation forecasts upward, which could mean that another cut in July may not be warranted. The president, Christine Lagarde, refused to commit to a program of cuts. Everything will depend on the economic data to be published in the summer.

Inflation forecasts according to the European Central Bank.

What do future rate decisions depend on?

In deciding on the next moves, the ECB said it will pay particular attention to wage dynamics, which are still rising at a pace that is not quite compatible with the 2% inflation target. A high pace of wage growth usually translates into higher prices.

The yield (Variable) of our Euro Savings Portfolios falls to 3.35%.

Our savings portfolios offer a return that accumulates at a variable yield similar to official rates, fewer costs. The previous variable yield was 3.6%. After the cut, it will drop to 3.35% for the lowest principal level, as we calculate the variable yield for the Savings Portfolio as of 6/13/2024. You can see the yield depending on the volume of the account, which can increase to 3.53% as per the table below:

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 yield. 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 1% higher than deposit rates, as shown in the graph below. This difference was 1.23% at the latest available data from the Bank of Spain (February 2024).

In the appendix below, we comment on the European Central Bank’s interest rate forecasts.

Target portfolios (yield 3.7%) and bond portfolios (up to 4.5%)

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 have launched Target Portfolios with maturities 12/2025, 4/2026, 12/2026 and 12/2027 with target returns up to 3.7%*. If you consider them, make sure you are convinced that you don’t need the money until that maturity (although the withdrawal is flexible, before maturity you may not get the return).

If your investment horizon is still short or medium term, but more indeterminate, we have recently strengthened our bond portfolios with yields as high as 4.5%*.

*Important note: these target returns or yields are the latest calculated as of 4/30/2024 and are subject to change. More details can be found in the corresponding pages of each portfolio.

Annex: European Central Bank’s interest rate forecast

According to the Survey of Professional Forecasters, official rates could fall by another 0.25% by the end of the year. By 2025 it could drop another 0.25% or more.

These forecasts are not reliable, and the reality may be different.