Interest Rates: Borrowing Becomes More Affordable

Recent adjustments to interest rates have made borrowing less expensive, particularly in the context of mortgage loans. Typically, construction financing rates tend to decrease ahead of the central bank's base rate changes, as lenders anticipate future reductions. This preemptive action is facilitated by the European Central Bank's (ECB) tendency to signal its monetary policy moves well in advance.

As a result of falling inflation rates, the ECB has lowered its key interest rate from 4.00% to 3.25% since June. The inflation rate within the Eurozone was reported at 2.3% in November. Expectations suggest that the inflation rate will likely exceed the ECB's target of 2.0% even into December. According to economic experts, it is anticipated that inflation may begin to ease come spring.

In 2024, the average annual inflation rate is projected to stabilize around 2.2%, aligning closer to the ECB's target of 2.0% for the following year. The significant inflationary period experienced in the Eurozone appears to have subsided, with inflation peaking above 10% in 2022. Contributing factors included supply chain disruptions related to the COVID-19 pandemic and the subsequent geopolitical tensions that affected energy and food costs.

The aftermath of these developments has led to labor unions demanding substantial wage increases in response to inflationary pressures, which, according to monetary authorities, has further sustained price increases.

Households with lower incomes have been particularly susceptible to ongoing price hikes, as essentials such as food and various services constitute necessary expenditures. Recent data from Germany indicates that inflation stood at 2.2% in November. The Federal Statistical Office confirmed its earlier estimates, noting a 3.7% decline in energy prices compared to the same month last year. Additionally, fuel costs saw a reduction of 6.6%, while electricity prices dropped by 4.1%.

However, food prices have risen by 1.8% over the past year. Notably, certain food items have experienced significant price increases, including cooking fats and oils (up 19.1%), butter (up 38.9%), and olive oil (up 13.3%). In the services sector, notable price hikes were recorded in insurance (up 16.6%), social services (up 8.0%), and dining out (up 6.7%).

The lingering effects of the prolonged surge in prices continue to be felt, as the baseline for living costs remains elevated compared to 2021. Not all sectors have the capacity to implement wage increases that would adequately offset these rising costs.