Fixed rate interest rates set by the ECB 2008-2024

In June 2024, the European Central Bank (ECB) reduced its fixed interest rate for the first time since 2016, implementing a 0.25 percentage point cut. This move marked the end of nearly five years of rising rates and reflected a more optimistic view of economic conditions. Three months later, the ECB introduced an additional rate cut, lowering the fixed interest rate to 3.65 percent. Just a month later, the third rate cut was implemented, setting the fixed interest rate to 3.4 percent in October 2024. These reductions followed a prolonged period of rate hikes: in July 2022, the ECB raised its fixed interest rate to 0.5 percent, the first increase since March 2016. After that, the ECB raised rates almost monthly, reaching 4.5 percent by December 2023 - the highest level since the 2007–2008 global financial crisis - where it stayed until May 2024. The ECB’s fixed interest rate is the rate at which it lends to commercial banks for overnight loans, ensuring short-term liquidity.

How does this ensure liquidity? 

Banks typically hold only a fraction of their capital in cash, measured by metrics like the Tier 1 capital ratio. Since this ratio is low, banks prefer to allocate most of their capital to revenue-generating loans. When their cash reserves fall too low, banks borrow from the ECB to cover short-term liquidity needs. On the other hand, commercial banks can also deposit excess funds with the ECB at a lower interest rate. 

Reasons for fluctuations  

The ECB’s primary mandate is to maintain price stability. The Euro area inflation rate is, in theory, the key indicator guiding the ECB's actions. When the fixed interest rate is lower, commercial banks are more likely to borrow from the ECB, increasing the money supply and, in turn, driving inflation higher. When inflation rises, the ECB increases the fixed interest rate, which slows borrowing and helps to reduce inflation.