The European Central Bank (ECB) cut its key interest rates in line with market expectations, marking the second time this year since June.
advertisement
As expected, the ECB cut interest rates on Thursday afternoon during the September Governing Council meeting.
The new interest rates were set at 3.65% for major refinancing operations, 3.90% for marginal lending facilities, and 3.50% for deposit facilities.
The main refinancing operation interest rate is the interest rate that banks pay to borrow funds from the ECB for a week, while the deposit facility interest rate is the interest rate that banks can use to make overnight deposits with the Eurosystem. The Marginal Loan Facility interest rate provides overnight credit to Eurosystem banks.
“The Board today decided to reduce the deposit facility rate, the rate that determines the stance of monetary policy, by 25 basis points, based on the Board’s latest assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of inflation. “Considering the monetary policy spillover effects, it is appropriate to take another step towards easing the degree of monetary policy restrictions,” the ECB statement said.
What do economists and market analysts think?
Sylvain Breuer, chief EMEA economist at S&P Global Ratings, shared his thoughts with Euronews Business after the announcement.
“As expected, the ECB cut interest rates by 25bps without any further policy guidance.Wage growth is far outpacing productivity and services inflation is accelerating again, leading the Governing Council to accelerate the pace of rate cuts. There is no reason to commit to further rate cuts at this stage.
“The upcoming 35bps cut in the repo rate is unlikely to have a significant impact. In the longer term it may act as a ceiling on money market rates, but banks’ liquidity needs are not well met by the ECB. “Banks currently have little incentive to take advantage of the market,” Breuer said.
Meanwhile, Grzegorz Drozz, a market analyst at Invest Konotoxia, agreed that the results were in line with expectations.
“The impact of this decision on the market is already visible, reflected in the increased volatility of EUR/USD and its attempts to break above the 1.10 level. This confirms the continuation of the rate cut cycle. “Why did the ECB take this action?” What is this decision?
“The ECB has acted faster than the Fed in cutting interest rates, but further rate cuts are expected in the US. Experts expect the ECB’s key interest rate to fall to 3.5% by the end of 2024. Analysts at Invest.Conotoxia.com think these predictions may be overstated, but a significant difference in the pace of rate cuts could push the euro/ This could lead to further appreciation of the US dollar,” Droz added. .
The monetary policy update follows the ECB’s decision to cut interest rates by 25 basis points in June, a move that was also largely expected by market participants.
Eurozone consumer price growth rate slows
The ECB’s decision comes at a time when inflation is easing. Consumer price inflation in the euro area slowed to 2.2% in August, according to preliminary figures, the slowest growth rate since July 2021.
However, core inflation remains at 2.8%, similar to the US. The sharp decline in annual inflation can be partly attributed to last year’s higher base.
Eurostat emphasized that “the economic slowdown was due to the base effect appearing in August and a sharp decline in energy costs.”
Although inflation is slowing, concerns remain about growth indicators.
advertisement
The euro zone’s gross domestic product (GDP) growth rate in the second quarter of 2024 is expected to remain at 0.2%, revised downward from the previous forecast of 0.3%. Performance across the region varied widely, with Germany, the region’s largest economy, contracting by 0.1%.
