ECB meets market expectations and cuts interest rates by 25 basis points

September 12 () –

The Governing Council of the European Central Bank (ECB) decided on Thursday to follow the script and lower interest rates by 25 basis points, so that the deposit rate (DFR) will remain at 3.50%.

The interest rates on the main refinancing operations (MRO) and the marginal lending facility (MLF) will decrease to 3.65% and 3.90%, respectively. These changes will take effect from 18 September 2024.

As a result, the spread between the deposit rate and the MRO rate will be 15 basis points and the spread between the deposit rate and the MLF rate will be a quarter of a point.

As analysts consulted by Europa Press had assumed, the ECB has resumed its cycle of monetary easing after having paused it at its July meeting, when it opted to maintain the price of money.

“On the basis of the Governing Council’s updated assessment of the inflation outlook, underlying inflation dynamics and the intensity of monetary policy transmission, it is now appropriate to take a further step in moderating the degree of monetary policy tightening,” the ECB said.

The body headed by Christine Lagarde has indicated that internal inflation remains “high” due to the “high” speed at which wages are growing. However, pressures on labour costs are moderating and profits are partially cushioning the impact of wage increases on inflation.

Financing conditions remain “restrictive” and economic activity remains “contained” as a reflection of weak private consumption and investment.

The ECB also recalled that it remains “determined” to return inflation to the 2% target in the medium term, for which it will keep rates at “sufficiently restrictive” levels for as long as necessary. Likewise, in future meetings these will be set with an approach dependent on the data and meeting by meeting.

Frankfurt will be particularly attentive to the assessment of inflation prospects, the dynamics of underlying inflation and the intensity of the transmission of monetary policy, and, all, “without committing in advance to any specific path of interest rates.”

The changes announced include the technical modification announced in March by the ECB and which will take effect on 18 September. In this way, the deposit rate has become the de facto reference rate for determining the interest that financial institutions receive, or pay if negative, for keeping their deposits at the ECB.

Previously, the refinancing rate was a more important variable when it came to informing the ECB’s monetary policy decisions. However, it has lost relevance over time due to excess liquidity in the financial system, resulting from banks’ greater access to ECB funds, which has resulted in banks making greater use of deposits.

The ultimate goal of the adjustment would be to align short-term interest rates in the money market with the decisions of the Governing Council, as well as to remove excess liquidity from the system so that it does not interfere with the correct transmission of monetary policy.

As regards the asset purchase programmes (APP) and the pandemic emergency purchase programme (PEPP), the ECB has indicated that the former continues to be reduced at a “measured and predictable” pace, given that the principal of the maturing securities has stopped being reinvested.

In the case of the latter, the Eurosystem has stopped fully reinvesting the principal amount of the maturing purchased amount. This is causing the PEPP portfolio to shrink by an average of €7.5 billion per month. The Governing Council is looking to end these reinvestments by the end of 2024.

MACRO FORECASTS

The ECB has kept its three-year headline inflation projections unchanged compared with the June projections. Overall, headline inflation is expected to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.

The estimates for the underlying variable in 2024 and 2025 have been revised “slightly upwards” due to higher-than-expected inflation in services. Excluding the impact of energy and food, the underlying variable will remain at 2.9% in 2024, 2.3% in 2025 and 2% in 2026.

However, the ECB has lowered its growth expectations and now anticipates GDP growth of 0.8% this year, 1.3% in 2025 and 1.5% in 2026, which represents a change of one-tenth less for the three years analysed.

INFLATION DATA

The eurozone inflation rate stood at 2.2% year-on-year in August, four-tenths below the 2.6% rise observed the previous month and the lowest reading of the figure since July 2021, according to the provisional estimate published on August 30 by the European statistical office, Eurostat.

The price slowdown in the single currency area reflected a 3% drop in energy costs after rising 1.2% year-on-year in July, while fresh food prices rose 1.1%, up 0.1%.

After stripping out the impact of energy, inflation remained at 2.7% in August, although excluding the cost of food, alcohol and tobacco, the underlying rate moderated to 2.8% from 2.9%.

Among euro area countries, the highest increases in the cost of living in August were recorded in Belgium (4.5%), Estonia (3.4%) and the Netherlands (3.3%). In contrast, the lowest increases were recorded in Lithuania (0.7%), Latvia (0.9%) and Slovenia, Finland and Ireland (1.1%).

In Spain, the interannual rate fell by half a point to 2.4%, reducing the unfavourable price differential for our country compared to the Eurozone to two-tenths of a point.