The ECB cuts the reference interest rate by 0.25%

The Board of Governors of the European Central Bank (ECB) decided, yesterday, to reduce the reference interest rate by 0.25%, marking a new step towards the moderation of the restrictive monetary policy, according to a press release issued by the said banking institution. Thus, the interest rate on the deposit facility reached 3.5% per annum, and the interest rate on the main refinancing operations and the marginal lending facility were reduced to 3.65% and 3.9%, respectively. These changes will come into force on 18 September 2024. This adjustment is part of the ECB's strategy to effectively influence the monetary policy stance by keeping rates at a sufficiently restrictive level to control inflation.

The Governing Council's decision was prompted by recent inflation developments. Current data points to inflation in line with expectations, and ECB experts forecast an average inflation rate of 2.5% for 2024, falling to 2.2% in 2025 and 1.9% in 2026. In the coming months, an intensification of inflation is expected, especially due to the impact of lower energy prices, which will come out of the annual inflation calculation. However, as 2025 progresses, the ECB expects inflation to move closer to its 2% target.

Core inflation, a key indicator of inflationary pressures, is also a concern for the ECB. Projections show that this will decrease from 2.9% in 2023 to 2.3% in 2025 and to 2% in 2026, although the dynamics of service prices has been revised slightly upwards. This development is partly the result of rising wages, which continue to support domestic inflationary pressures.

In terms of economic growth, the ECB forecasts a modest advance of 0.8% in 2024, which will accelerate to 1.3% in 2025 and 1.5% in 2026. These projections have been slightly revised downwards from previous estimates , reflecting weaker domestic demand. Economic activity remains limited, influenced by tight financing conditions and a low level of private consumption and investment.

Another important aspect of the ECB's decisions is related to the changes to the operational framework for the implementation of monetary policy, announced in March 2024. In this context, the spread between the interest rate on the main refinancing operations and the interest rate on the deposit facility will be set at 15 basis points, while the spread between the interest rate on the marginal lending facility and that on the main refinancing operations will remain at 25 basis points.

The ECB remains committed to ensuring that inflation returns to the 2% target over the medium term and to maintaining price stability. To this end, the Governing Council will continue to adjust its tools to economic and financial developments, maintaining a data-driven approach. The ECB will also use the monetary policy transmission protection tool (TPI) to counter potential market failures that could affect the effectiveness of its policy across the euro area.