ECSB leaves key interest rate unchanged at 4.25%

The economic and geopolitical events, in particular the Russian war of aggression in Ukraine, which shaped 2022, will continue to have an impact in 2024. One consequence of the crises is a historic rise in inflation rates. In the meantime, there are signs of a downward trend in inflation again. For example, the inflation rate in Germany was 2.20% in June 2024, compared to 3.70% in December 2023. The last time the inflation rate was at this level was in May 2021 (2.20%).

Despite the stagnating trend in the current inflation rate, it is still above the ECB's inflation target of 2.0% in the medium term. This is due in particular to price increases for services. The ECB's economists expect overall inflation to rise until 2025, which is why the ECB is currently pausing interest rates and leaving the key interest rate in the eurozone at a high level of 4.25%. Analysts therefore expect the key interest rate to be cut twice this year by a quarter of a percentage point each in September and December 2024. As a result, the key interest rate would be less than 4.00% again by the end of the year.

The key interest rate hikes by central banks to date have had a significant impact on borrowing costs for companies and private households, which have risen considerably since the key interest rate hikes began. Private households have felt the rise in borrowing costs, particularly when taking out loans to finance real estate. Companies with a high debt ratio that have been able to refinance investments at favorable terms for years will have to finance themselves at less favorable conditions in the future when rescheduling debt.

The effects of the rise in key interest rates are also making themselves felt in connection with valuation-related issues. In January 2022, the valuation-relevant prime rate according to IDW S 1 was still 0.10 %. In the meantime, the valuation-relevant risk-free prime rate according to IDW S 1 rose to 2.75 % (November 01, 2023 to January 01, 2024). As at July 01, 2024, the valuation-relevant base interest rate according to IDW S 1 fell to 2.50 %.

As a result, further (interest rate) developments cannot yet be estimated. However, in the event of further prime rate adjustments, it can be assumed that the cost of debt and equity relevant for company valuations will also change. However, in the event of interest rate cuts, which are expected for September and December 2024, no significant change in the general interest rate level relevant to valuation is to be expected in the short term.

In practice, the effects on accounting and valuation issues as well as on the appropriate interest rate for interest-relevant matters must be kept in mind, especially in light of the already high interest rate level in 2023 and 2024 - compared to the previous low-interest phase - regardless of further interest rate adjustments. In particular, the appropriateness of existing interest regulations must be reviewed and adjusted if necessary.