Is going into debt worth it? Let’s say that after the (slight) cut in the cost of money, decided by the ECB, getting into debt is a little less painful. In short, the reduction – which was expected – decided in Frankfurt was not colossal, on the contrary. So much so that banking stocks celebrated: the remuneration on personal loans and mortgages will remain high. The small cut was then accompanied by a warning: “don’t expect linear cuts” said Christine Lagarde; translated: it is not certain that the rate cut will be continued and accentuated in the next ECB meetings (the next one already in mid-July); On the contrary.
In short, there is no point in toasting; nor to make excessive debts. Not much has changed. Families with variable rate mortgages are among the categories that will notice the cut in the cost of money more than others. For those who have a variable rate mortgage (for 125 thousand euros over 25 years) they should already record a reduction of -48 euros per month compared to the November 2023 peak, saving up to 576 euros per year.
THE EFFECTS OF CUTTING
But what could be the effects of the ECB’s “small” cut for the investor?
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BTP. Regarding BTPs, the reduction in the cost of money will cause the price of bonds already in circulation to move upwards and the yield on government bonds to move downwards, especially for future issues which, theoretically, will become less attractive than in the past. To give an example, let’s take an investor who bought a BTP that offers an interest rate of 3%. If rates fall to, say, 1%, the BTP becomes more attractive because it offers a higher return than new bonds issued with a lower rate. As a result, demand for the previously purchased BTP increases, causing the price to rise.
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ACTIONS. For the stock market the forecast is more complex. As we have seen, bankers have reacted well, since the slight cut should not have a major impact on the earnings of credit institutions. Usually, when rates begin to fall the markets become more volatile and turn downwards. For the markets, in fact, the rule of “buy on rumors, sell on news” is very valid, only to then recover shortly. You bet on rumors, not information. But it is also true that in the medium term companies increase in value (they have fewer financial constraints) and therefore investing in shares could be convenient.
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DEPOSIT ACCOUNTS. With falling interest rates, those who have money in deposit accounts may see a decrease in remuneration because, as explained by the ECB itself: “interest is the amount that your savings yield, i.e. the return you receive when the bank to “borrow money” from you.”
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GOLD. Gold could also see sharp price drops, as it is traded globally in US dollars. So, when the dollar strengthens against other currencies, gold becomes relatively more expensive for buyers using these other currencies. As a result, demand for gold may decrease, leading to a reduction in the price.
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EUR. With the rate cut, the euro will most likely lose value against the dollar. Essentially, since rates in the US will be higher (the Fed wants to wait a little longer before reducing its rates), they will attract more foreign capital than in Europe because they will consequently have a higher return.
WHERE TO INVEST?
In these situations, you usually invest in government bonds. Europeans, to be precise. But Americans can also have some nice surprises in store.
Regarding corporate bonds, i.e. those bonds issued by private (non-governmental) companies with a very high credit rating, the best choice obviously falls on those of higher quality such as AA or AAA. But as mentioned, the stock market could also reserve some good opportunities.
