European Central Bank slashes interest rates again, cuts growth forecasts

In a move aimed at bolstering economic activity, the European Central Bank (ECB) Governing Council announced a reduction in the deposit facility rate by 25 basis points, bringing it down to 3.50% effective September 18, 2024.

This decision reflects the ECB's ongoing efforts to influence monetary policy positively and stimulate economic growth within the eurozone.

Alongside the deposit facility rate cut, the ECB has adjusted other key interest rates: the primary refinancing operations will now be set at 3.65%, while the marginal lending facility rate will be reduced to 3.90%.

The interest rate spread between the main refinancing operations and the deposit facility rate will be 15 basis points, and the spread between the marginal lending facility and the main refinancing operations remains unchanged at 25 basis points.

This adjustment aims to enhance banks' lending margins, thereby encouraging economic activity and boosting consumer confidence.

Asset Purchase Programme (APP) adjustments

In addition to the interest rate changes, the ECB is recalibrating its asset management strategies.

The APP portfolio is decreasing as the Eurosystem halts reinvestments of principal payments from maturing assets.

This strategic shift signifies a move towards maintaining monetary stability while gradually reversing previous expansionary policies.

The ECB has also ceased reinvesting principal payments from the Pandemic Emergency Purchase Programme (PEPP), with an average portfolio reduction of €7.5 billion per month.

The reinvestments under PEPP are expected to be completed by the end of 2024, reflecting a transition to a more normalized monetary stance.

The ECB is closely monitoring the repayments of targeted longer-term refinancing operations (TLTROs).

This scrutiny is crucial for assessing the impact of liquidity on Eurozone banks and overall economic health, showcasing the ECB’s proactive approach to financial system management.

The Governing Council remains committed to using a full range of measures to meet inflation targets while supporting the eurozone’s economic recovery.

Lagarde and de Guindos on policy decisions

ECB President Christine Lagarde and Vice-President Luis de Guindos announced the 25 basis point rate cut, emphasizing that the decision was based on a revised assessment of the inflation outlook and monetary policy effectiveness.

Lagarde stated,

Lagarde noted that while headline inflation is projected to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, core inflation is expected to decline from 2.9% in 2024 to 2.0% by 2026.

Despite a temporary rise in inflation due to prior energy price declines, wage growth remains high, but labor cost pressures are moderating, with profits cushioning the impact on inflation.

The ECB forecasts weak economic growth of 0.8% in 2024, improving to 1.3% in 2025 and 1.5% in 2026.

The central bank remains committed to maintaining restrictive policy rates as necessary to achieve its 2% medium-term inflation target, using a data-driven approach to determine the optimal levels and duration of monetary constraints.