As expected, the European Central Bank cut its interest rates on Thursday afternoon during its September meeting.
The new interest rates were set at 3.65% for the main refinancing operations, 3.90% for the marginal lending facility and 3.50% for the deposit facility.
The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for a week, and the deposit rate is the rate banks can use to make overnight deposits with the Eurosystem. The interest rate on the marginal lending facility offers banks overnight credit from the Eurosystem.
"Today, the Governing Council decided to lower by 25 basis points the interest rate on the deposit facility, the rate through which it guides the monetary policy stance. Based on the Governing Council's updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take a further step towards moderating the degree of monetary policy accommodation," the ECB said in a statement.
Sylvain Breuer, chief economist for Europe, Middle East and Africa at S&P Global Ratings, shared his thoughts with Euronews Business after the announcement.
"As expected, the ECB implemented a 25 bp rate cut without additional policy guidance. With wage growth far outpacing productivity growth and service sector inflation picking up again, there is no reason at this stage for the Governing Council to accelerate the pace of rate cuts or commit to further reductions.
"The impending 35 bps cut in the repo rate is unlikely to have a material impact. While it may serve as a ceiling for money market rates in the long run, banks currently have little incentive to use the markets as their liquidity needs are fully met by the ECB," Breuer said.
Meanwhile, Grzegorz Drozd, market analyst at Invest Conotoxia, also confirmed that what was expected has happened.
"The impact of this decision on the market is already visible, which is reflected in the increased volatility of the EUR/USD pair and an attempt to break the 1.10 level. This confirms the continuation of the interest rate cutting cycle. Why did the ECB take this decision? Preliminary data on inflation in the Euro area showed that it stood at 2.2%, almost reaching the target level, while the economy seems to have stalled. This state of affairs did not leave the ECB with too many options.
"Although the ECB has acted faster than the US Federal Reserve in cutting interest rates, more cuts are expected in the US. Experts predict that by the end of 2024, the ECB's key interest rate will fall to 3.5%, while the Fed could cut it by 125 basis points - to 4.0-4.25%. Although Invest.Conotoxia.com analysts believe that these forecasts may be exaggerated, the significant difference in the pace of rate cuts could lead to a further rise in the EUR/USD pair," Drozd added.
The monetary policy update followed the ECB's June decision to cut interest rates by 25 basis points, a move that was also largely anticipated by market participants.
The ECB's latest decision comes at a time when inflation is falling. According to flash estimates, consumer price growth in the euro area slowed to 2.2% in August, marking the slowest increase since July 2021.
However, underlying inflation, as in the US, remained resilient at 2.8%. The sharp fall in annual inflation can be partly attributed to the higher base last year.
Eurostat stressed that "the slowdown is due to a sharp fall in energy costs as base effects emerged in August".
Although inflation cooled, growth indicators remained worrying.
Eurozone gross domestic product (GDP) grew by just 0.2% in the second quarter of 2024, a downward revision from the earlier estimate of 0.3%. Within the bloc, results varied widely, with Germany, the region's largest economy, contracting by 0.1%. | BGNES
