What is the current key interest rate?
Last updated: 06.01.2025
After several key interest rate hikes in a row, interest rates remained at a constant level for almost a year. The first interest rate cut took place in June 2024 due to a falling inflation rate. The second interest rate cut was decided in September, followed by others in October and December. Key interest rate decisions are usually made every six weeks. The current key interest rates (as of January 2025) are:
- Deposit interest rate: 3.00%
- main refinancing rate: 3.15%
- marginal lending rate: 3.40%
What is the key interest rate?
The key interest rate refers to interest rates that are set by the national and central banks of the respective countries. Credit institutions and commercial banks can borrow money from the central bank or invest there at these interest rates . The aim of the central banks is to ensure price stability through the key interest rate . There are three different key interest rates: the main refinancing rate, the deposit rate and the marginal lending rate. When people talk about the “key interest rate”, they usually mean the main refinancing rate.
In the Eurozone, the European Central Bank (ECB), based in Frankfurt am Main, sets the level of the key interest rate. If the key interest rate is lowered, this is referred to as an expansionary monetary policy . It becomes cheaper for banks to borrow or invest money. This is intended to promote economic growth. If, on the other hand, interest rates are raised, this is a restrictive monetary policy , which has the opposite effect.
How does the key interest rate work?
The function of the key interest rate depends on its type, i.e. whether it is the main refinancing rate, the deposit rate or the marginal lending rate.
What is the main refinancing rate?
The main refinancing rate is often referred to as the ECB’s “actual key interest rate”. As an instrument of main refinancing, it regulates the conditions under which banks can borrow money from the ECB . The prerequisite is that the banks provide the appropriate collateral in the form of eligible securities.
An auction takes place once a week. Here, banks must offer at least the key interest rate set by the ECB in order to receive the available quota of central bank money. In the bidding process, the highest-bid bank wins the contract.
The ECB can indirectly influence the money and capital markets via the main refinancing rate . If the ECB lowers the interest rate, banks can refinance more cheaply. Cost advantages are usually passed on to customers. The result: companies and private individuals take out loans on better terms. If the ECB increases the key interest rate, interest rates on loans rise.
What is the deposit interest rate?
The deposit rate regulates capital investments at the ECB. The interest rate has two functions:
- It specifies the conditions under which commercial banks can invest money with the ECB in the short term . This way, for example, they avoid surplus liquidity being left unused. The balance is then left overnight (overnight money) with the ECB and generates a return that corresponds to the interest rate.
- As the ECB’s key interest rate, the deposit rate has monetary policy significance. Banks can invest excess money with other banks. The prerequisite for this is that more attractive interest rates can be found on the interbank market than at the ECB. The deposit rate therefore represents the lower limit for the overnight interest rate . If the ECB increases the key interest rate, banks are required to increase their interest rates for overnight deposits as well. If the ECB lowers the deposit rate, the banks adjust their interest rates downwards accordingly.
This has put more focus on the deposit rate than on the main refinancing rate. According to the ECB, the deposit facility is the guiding principle for its monetary policy.
What is the marginal lending rate?
The marginal lending rate marks the upper limit of the interest rate corridor at which banks can borrow money from the ECB. Marginal lending is primarily used to provide short-term loans to commercial banks . These are so-called overnight loans that are due again the next day. Marginal lending is intended to prevent banks from experiencing short-term liquidity bottlenecks, as they can obtain capital from the ECB at any time.
However, the marginal lending rate is also used by the ECB to enforce its interest rate policy on the market . In order for banks to borrow money from other banks in the short term, the interest rates on the interbank market must be lower than the key interest rate set by the ECB. Otherwise, lending between banks would not be worthwhile. So if the ECB lowers the interest rate, the banks also lower their interest rates for overnight loans – if the interest rate rises, commercial banks can conversely charge higher interest rates.
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What impact does the key interest rate have on the economy?
The key interest rate has a significant impact on the economy and influences various economic parameters. For example, it influences the terms of lending and investments, consumer behavior, exchange rates and inflation . The exact effects depend on whether the key interest rate rises or falls. The ECB is currently aiming to stimulate the economy in Germany, the largest economy in the eurozone, in order to be able to record growth in the coming months.
What does a rising key interest rate mean?
An interest rate increase can lead to stagnating economic growth and thus to falling inflation. Possible consequences of key interest rate increases can include:
effects of a key interest rate increase
For savers
- Interest rates on savings deposits such as call money or fixed-term deposits are rising
- The real interest rate could still be negative due to high inflation
- For borrowers
Taking out loans is becoming more expensive for companies and private investors. This applies, for example, to loans for business investments or real estate loans.
What does a falling key interest rate mean?
Lowering key interest rates can stimulate the economy. Inflation can also rise in the process. The effects include, for example:
effects of a key interest rate cut
For savers
- Interest rates on savings deposits are decreasing. Banks can also charge negative interest rates
- In particular, it is generally not possible to build up wealth with traditional savings deposits such as savings accounts .
For borrowers
Loans can be offered on better terms (low interest rates), which should encourage the willingness to invest.
What are the goals of the key interest rate policy?
The objectives of the key interest rate policy are primarily price stability and economic stability. Price stability is ensured by a low and stable inflation rate. The ECB’s inflation target is 2.00% . An inflation rate of 2.00% is considered appropriate for stable economic growth. By changing the key interest rates, the central bank can influence the interest rates on loans and deposits. This has an impact on the demand for goods and services, investments and the labor market.
Why was the key interest rate at a record low for so long?
In the wake of the global financial crisis in 2008 and the associated debt crisis in the eurozone, the European Central Bank also became active. One of the many measures taken was a regular reduction in the key interest rate to 0.00% since 2016. The aim was for banks to increase their lending to companies and households in order to stimulate the economy . This should strengthen the economy. People are given less incentive to invest their money. The result is that more is consumed and invested. Low interest rates also have an effect on your own currency compared to foreign currencies: the price of your own currency is reduced.
In September 2014, the European Central Bank lowered the key interest rate for bank deposits to a negative value. This negative interest rate meant that banks had to pay penalty interest if they wanted to invest money with the ECB in the short term.
Why was the key interest rate not raised again?
Due to the Corona crisis and the war in Ukraine, the inflation rate in the euro area rose sharply. The ECB has responded to this with several interest rate hikes in recent years. Since the inflation rate has fallen, the ECB decided to lower key interest rates at the beginning of June 2024. Further interest rate cuts followed in September, October and December (as of January 2025).
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