ECB interest rates explained

The European Central Bank (ECB) plays a crucial role in determining key interest rates that influence the economy of the Eurozone and beyond. This guide explains how the ECB sets these rates, what the different types of rates are (such as deposit and lending rates), and how they affect savings, investments, and borrowing. 

ECB stands for the European Central Bank. This is the central bank responsible for managing the monetary policy of Ireland and the Eurozone (which comprises 20 other EU member states that have adopted the euro as their official currency). The ECB's primary mission is to maintain price stability within the Eurozone by controlling inflation and ensuring the smooth operation of the financial system.

When people talk about ECB rates, they are referring to the interest rates set by the European Central Bank. These rates influence a number of things, including the cost of borrowing money, the return on savings, and the overall economic activity in the region. By increasing or decreasing these rates, the ECB can either encourage or discourage spending and investment, in order to keep inflation in check and support economic growth.

The ECB sets three key interest rates that serve different purposes in the banking system:

1. Main refinancing rate: This is the rate banks pay when they borrow money from the ECB for one week.

2. Deposit interest rate: The rate on the deposit facility, which banks can use to make overnight deposits with the Eurosystem.

3. Marginal lending rate: The rate at which banks can borrow money from the central bank against collateral for a period of one day (or overnight).

The most important ECB rate is usually considered to be the main refinancing rate. This rate serves as a benchmark for the cost of credit throughout the Eurozone and is crucial in determining the overall level of interest rates in the economy. Changes to this rate typically have a significant impact on businesses and consumers, as banks will decrease or increase rates on their products (for example, mortgages, savings accounts and loans) in response to the ECB rate.

The main refinancing rate is the interest rate banks pay when they borrow funds from the ECB for a short period, usually one week. This rate influences the overall level of interest rates in the economy, affecting everything from business loans to mortgages. By adjusting this rate, the ECB can influence the amount of money in circulation, aiming to either stimulate or slow down economic activity.

The deposit rate is the interest rate at which commercial banks can borrow money from the ECB in the short term (e.g. overnight). A low marginal lending rate drives inflation, while a higher marginal lending rate can slow it down. A negative deposit rate, which has been implemented in recent years, means that banks are charged for keeping their money with the ECB, encouraging them to lend more to businesses and consumers, rather than ‘hoarding’ cash.

The marginal lending rate is the rate at which banks can borrow additional funds from the ECB overnight, often as a last resort. This rate is typically higher than the main refinancing rate, as it serves as a penalty rate for banks that need emergency liquidity. Its existence therefore ensures that banks have access to funds, while discouraging excessive reliance on ECB support.

The latest ECB decision was made in December 2024 (effective from 18 December). Rates were cut for the fourth time this year:

• The main refinancing rate was cut to 3.15%

• The marginal lending rate was cut to 3.40%

• The deposit rate was cut to 3.00% 

To find the most up-to-date rates, you should check the ECB website.

The ECB exchange rate refers to the official exchange rates published by the European Central Bank, reflecting the value of the euro against other currencies. These rates are used as reference rates for transactions and financial reporting and are updated regularly based on the prevailing market conditions.

The ECB rate will likely affect your mortgage if you have a variable-rate mortgage. When the ECB raises its key interest rates, the cost of borrowing typically increases, leading to higher mortgage payments. Conversely, if the ECB lowers rates, your mortgage payments may decrease. The exact impact depends on your mortgage agreement and how closely your lender's rates track the ECB's rates.

The ECB affects the market in Ireland (and therefore Irish people’s day-to-day lives) in a number of ways. Changes in ECB rates can influence everything from stock prices to bond yields to the value of currency. Banks may decrease or increase rates on their products (for example, mortgages, savings accounts and loans) in response to an ECB rate cut or hike. A rate hike might strengthen the euro as higher interest rates attract foreign investment, while a rate cut could boost stock markets by lowering borrowing costs for companies.

The ECB’s primary objective is to maintain price stability and preserve the purchasing power of the euro. They do this by making sure that inflation – the rate at which the overall prices for goods and services change over time – remains low, stable and predictable. A moderate level of inflation, ideally close to but below 2%, is considered optimal for economic growth. This is the same as the target set in the UK and the United States.

The ECB rate was cut four times in 2024. If inflation continues to subside, there could be room for the ECB to continue lowering rates in 2025.

The future can’t be predicted, and regardless of what happens with the ECB rate next, there’s never a bad time to save. Whether it’s to take advantage of future spikes in interest rates or to protect yourself and your family from an unseen financial fallout, opening a savings account will give you more for your money.

To find the best savings account for you and compare interest rates on savings accounts, register for a Raisin Account and log in to apply.