On Thursday 29 October, the European Central Bank (ECB) left all three of its key interest rates unchanged: the deposit facility rate stays at 2.50%, the main refinancing rate at 2.65% and the marginal lending facility rate at 2.90%. Markets had expected the ECB rate decision, and Euribor barely moved. What matters more for small business owners is that rates have gone up twice this year – and inflation is still picking up.
What did the ECB decide, and why?
The ECB raised rates in June, lifting the deposit rate to 2.25% (effective 17 June), and again in September to 2.50% (effective 16 September). In October, the Governing Council pressed pause. The backdrop is rising prices: according to Eurostat, annual inflation in the euro area accelerated to 3.8% in September, up from 3.2% in August. Energy and services were the biggest drivers.
High inflation keeps the central bank on its toes. The ECB makes no promises in advance and decides meeting by meeting. The next rate decision is due on 17 December, and on 4 November Eurostat will publish its flash estimate of October inflation. If inflation keeps accelerating, another hike is on the table.
Euribor tells you what your loan really costs
The cost of a business loan does not track the ECB deposit rate directly. It follows Euribor, to which the bank adds its own margin. According to Euribor-rates.info, on 30 October the 3-month Euribor stood at 2.676% and the 12-month Euribor at 3.306%.
Let’s run an example. A business owner has a €100,000 loan pegged to the 12-month Euribor with a margin of 2.0 percentage points. That puts the interest rate at around 5.3%, so the annual interest cost on the full principal is about €5,300 before repayments. Every 0.25 percentage point change means €250 a year for every €100,000 borrowed. These figures are an illustration, not an offer.
The economy is still growing – just more slowly
Higher rates have not stopped growth. According to Eurostat’s flash estimate published on 30 October, euro area GDP grew by 0.4% in July–September compared with the previous quarter, after 0.6% in April–June. Finland’s GDP grew by 0.5% on the previous quarter and by 1.8% year on year.
For small business owners, the message is mixed. Demand is not collapsing, but money is clearly more expensive than in the zero-rate years. An investment therefore has to earn more than it used to before it pays off.
Five things small business owners should do now
- Check the reference rates and reset dates on your loans. Know when the next interest period starts and which Euribor your loan is tied to.
- Run your cash flow through a cautious scenario. Test what happens if rates rise by another 0.5 percentage points. If your cash position can take it, you can sleep soundly.
- Shop around for financing. The margin is negotiable, and collateral or a guarantee can get you better terms.
- Review your prices and the indexation clauses in your contracts. With inflation at 3.8%, last year’s prices are quietly eating into your margin.
- Keep a buffer. A cash buffer is insurance, not an expense – especially when the direction of interest rates is uncertain.
What’s the takeaway?
The ECB’s October pause does not mean the rate hikes are over. It means the central bank is waiting for more data on inflation. The smartest course for a business owner is to prepare for financing staying expensive for a long time, and to build a business that can withstand it. The price of money is always part of your competitiveness – as is the way the financial markets work more broadly.
Sources
Innohub TV
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