The European Central Bank today cut its deposit rate by 25 basis points to 2.75 per cent – a move that was widely expected. However, the reactions from the real estate and financial sectors show a differentiated picture of the effects on the market and the economy.

Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank (HCOB), sees the decision as a further step towards a normalised interest rate structure. ‘In a healthy economy, the price of money rises the longer it is available. Long-term interest rates have already risen by 20 basis points since the beginning of the year. We consider a medium-term interest rate cut to be unlikely as long as neither inflation picks up again nor a sustained recession threatens.’

Prof. Dr. Felix Schindler, Head of Research & Strategy at HIH Invest, also views the interest rate cut as expected and predicts further steps in the coming months. ‘The situation at the middle of the year will be interesting when the interest rate gap with the USA widens further and puts the euro under pressure. At the same time, growth momentum in Europe will remain weak, while core inflation and price pressure in the service sector are likely to remain above the ECB target. Discussions about the ECB’s monetary policy could then become more controversial.’

A more critical assessment is provided by Francesco Fedele, CEO of BF.direkt AG. He points out that inflation in the eurozone is still not under control. ‘It rose from 2.2 per cent in November to 2.4 per cent in December. Price developments in the service sector in particular are driving inflation. Nevertheless, the ECB is lowering the key interest rate again – this could have consequences.’

Prof. Dr. Steffen Sebastian from the IREBS Institute for Real Estate is cautious about the decision. ‘While key interest rates often have a delayed effect on the real economy, capital markets react immediately. If the interest rate cut raises expectations of rising inflation, long-term interest rates could even rise. After the last ECB meeting on 12 December 2024, the ten-year swap jumped from 2.22 to 2.50 per cent. The ECB should proceed cautiously with further interest rate cuts – especially since the US Federal Reserve (Fed) has recently refrained from a further interest rate cut.’

By contrast, Patrick Brinker, Head of Real Estate Investment Management at Hauck Aufhäuser Lampe, does not expect any significant impact on the real estate industry. ‘Even a psychological effect is not to be expected. The market has adjusted to the current interest rate level, and the industry can work with it again. Although there is still a certain reluctance to invest, we see selective opportunities for niche strategies with attractive yields.’

Dr Tim Schomberg, CEO of KINGSTONE RE, expects a stabilising effect in the long term. ‘The further interest rate cut was announced, and the ECB aims to gradually reduce the deposit rate to around 2.0 percent by the end of 2025. The impact on ten-year government bonds is limited, but a more stable interest rate structure makes long-term real estate investments more attractive. A normalised interest rate market gives investors more planning security and strengthens the value of real estate.’

Opinions on the ECB decision vary: while some market participants see a positive normalisation of interest rates, others warn of possible risks for inflation and capital markets. How interest rates develop in the coming months is likely to be of great importance not only for real estate investors.

Photo’s: Peter Axmann, Leiter Immobilienkunden, Hamburg Commercial Bank, Prof. Dr. Felix Schindler, Head of Research & Strategy, HIH Invest, Francesco Fedele, CEO, BF.direkt AG, Prof. Dr. Steffen Sebastian, Lehrstuhl für Immobilienfinanzierung, IREBS Institut für Immobilienwirtschaft, Universität Regensburg, Patrick Brinker, Head of Real Estate Investment Management, Hauck Aufhäuser Lampe and Dr. Tim Schomberg, CEO, KINGSTONE RE

Germany is facing increasing pressure to reform its strict debt brake rules, with policymakers advocating for changes that balance fiscal responsibility and long-term investment. The current framework, which significantly limits government borrowing, has been criticized for hindering public investment and placing an unfair burden on future generations. Experts argue that a revised intergenerational debt rule is necessary to ensure economic stability, infrastructure development, and sustainability while preventing excessive debt accumulation.

The debt brake, introduced into Germany’s Basic Law in 2009, restricts the federal government’s structural new debt to 0.35% of GDP annually, allowing for minor flexibility in economic downturns. The Federal Constitutional Court further tightened its application in a landmark ruling in November 2023, making it harder for governments to justify exceptions. Supporters of the rule argue that keeping debt levels low ensures economic resilience and prevents future financial crises. However, critics contend that it prevents essential investments in infrastructure, digitalization, education, and climate protection, ultimately harming future generations rather than securing their prosperity.

A proposed reform introduces four key changes aimed at balancing fiscal discipline with economic growth. The first change suggests a nominal expenditure rule, allowing debt to grow in line with nominal potential GDP growth rather than being arbitrarily capped. This adjustment would stabilize Germany’s debt ratio at around 60% of GDP, aligning it with European fiscal norms while ensuring the state can act during economic downturns. The second change calls for reintroducing a Golden Rule, which would exempt public investment from debt limits, ensuring net investment remains positive to prevent deterioration of public infrastructure. Meanwhile, public consumption spending would shrink proportionally to demographic changes, optimizing government expenditure efficiency.

The third aspect of the reform focuses on implicit sovereign debt, including long-term liabilities in social security and climate adaptation costs. Currently, Germany’s aging population and increasing climate-related obligations pose significant financial risks. Under the proposed rules, these liabilities should decrease in line with declining employment potential to prevent overburdening younger generations. The final pillar of the reform addresses equity in government spending, ensuring that investments benefit all social groups, particularly those in structurally weaker regions. This measure aims to secure equal opportunities and a fairer distribution of public resources.

The debate over reforming the debt brake has gained momentum as even traditionally conservative parties, including the CDU/CSU, acknowledge the need for adjustments. With Germany’s economic future at stake, policymakers face a crucial decision: maintain a rigid fiscal policy that limits growth or adopt a modernized debt rule that balances sustainability with economic progress. Whether this reform moves forward depends on political consensus, but one thing is clear: Germany must rethink its approach to public debt if it wants to ensure prosperity for future generations.

Source: DIW Berlin