The European Central Bank cuts interest rates again as inflation slows

As expected, the ECB cut interest rates on Thursday afternoon during its September meeting.

New interest rates were set at 3.65% for main refinancing operations, 3.90% for the marginal credit facility and 3.50% for the deposit.

The main refinancing rate is what banks pay when they borrow money from the ECB for a week, while the deposit facility rate is what banks can use to make overnight deposits with the Eurosystem. The marginal lending facility rate provides overnight credit to Eurosystem banks.

“The Governing Council decided today to lower by 25 basis points the deposit facility rate, the rate by which it directs monetary policy. According to the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of the transmission of monetary policy, it is now appropriate to take a further step to moderate the degree of monetary policy tightness,” an ECB statement said.

What do economists and market analysts think?

Sylvain Broyer, S&P Global Ratings Chief Economist for EMEA, shared his views with Euronews Business following the announcement.

“Unsurprisingly, the ECB implemented a 25bp rate cut without any additional policy guidance. With wage growth far outpacing productivity and services inflation picking up again, the governing council has no reason to accelerate pace of rate cuts or commit to further rate cuts at this stage.

“The upcoming 35bps cut in the repo rate is unlikely to have a significant impact. While it may serve as a ceiling on long-term money market rates, banks currently have little incentive to tap the markets as the ECB it’s fully meeting their liquidity needs,” Broyer said.

Meanwhile, Grzegorz Drozdz, market analyst at Invest Conotoxia, also confirmed that it was what was expected.

“The impact of this decision on the market is already visible, as reflected in the increased volatility of the EUR/USD pair and an attempt to break above the 1.10 level. This confirms the continuation of the interest rate cut cycle. Why the ECB made this decision?Preliminary data on inflation in the euro area showed that it stood at 2.2 percent, almost hitting the target, while the economy appeared to be at a standstill.

“Although the ECB is moving faster than the Fed to cut interest rates, more cuts are expected in the US. Experts predict the ECB’s main interest rate will fall to 3.5 percent by the end of 2024, while the Fed could cut by 125 percent, to between 4.0 and 4.25 percent Although the analysts of Invest.Conotoxia.com believe that these forecasts may be exaggerated, a significant difference in the pace of interest rate cuts could lead to a further rise in the EUR/USD pair,” added Drozdz. .

The monetary policy update follows the ECB’s decision in June to cut interest rates by 25 basis points, a move that was also widely anticipated by market participants.

Growth in consumer prices in the euro zone is slowing

The ECB’s latest decision comes as inflation eases. Eurozone consumer price growth slowed to 2.2% in August, according to flash estimates, the slowest increase since July 2021.

However, core inflation, as in the US, remains persistent at 2.8%. The sharp decline in annual inflation can also be attributed in part to a higher base last year.

Eurostat highlighted that “the slowdown was due to a sharp fall in energy costs as base effects came into play in August”.

While inflation is cooling, growth indicators have remained worrisome.

Eurozone gross domestic product (GDP) grew by just 0.2% in the second quarter of 2024, a downward revision from the previous estimate of 0.3%. Across the bloc, performance varied significantly, with Germany, the region’s largest economy, contracting 0.1%.