ECB cuts interest rates by 25 basis points: the economy is shrinking
The European Central Bank reduces the cost of money for the fourth time since it started cutting rates last June. The ECB decided to cut interest rates by 25 basis points to support the shrinking economy. Inflation is still projected to be high, but the central bank is preparing for political and trade uncertainties
2' min read
2' min read
Another cut. With the concrete prospect of a rapid continuation on this course, towards normalisation of rates. The ECB Governing Council decided today to cut the cost of very short-term credit by 25 basis points, as expected. The rates on deposits at the central bank only then dropped to 3 per cent, the reference rate to 3.15 per cent and the rate on the marginal lending facility to 3.40 per cent. Gone in the communiqué was the commitment to keep monetary policy at a 'sufficiently restrictive' level, even though the current monetary policy 'remains restrictive'.
Indeed, macroeconomic projections show inflation at an average of 2.4 % in 2024, 2.1 % in 2025 and 1.9 % in 2026, and 2.1 % in 2027, "the year of entry into force of the expanded EU Emissions Trading Scheme". The 2026 figure - in the middle of the monetary policy horizon - suggests that at the current level rates are even slightly restrictive. Core inflation - partially confirming this assumption - is also expected at 2.9 per cent in 2024, 2.3 per cent in 2025 and 1.9 per cent in 2026 and 2027. The risks on inflation, explained President Christine Lagarde at the press conference, are more symmetrical than in the past: the possibility of it deviating from the downward target is therefore higher.
It is very likely, however, that the ECB wants to maintain some room for manoeuvre, in terms ofrisk management. At the meeting, she revealed, a larger cut, of 50 basis points, was proposed, although the consensus later coagulated on a lower cut. 'This is still not a victory on inflation,' Lagarde commented. "Domestic inflation," the statement further explained, "has declined but remains elevated, mainly because wages and prices in certain sectors are still adjusting to past inflation increases with considerable lag"; although the disinflationary process appears to be "well underway."
The central bank probably also intends to support real wages, which have been very compressed in recent months. The expected recovery in the coming quarters - after the 'contraction' expected this autumn - is attributable, the ECB explains, 'mainly to the increase in real incomes, thanks to which households should be able to engage in more consumption' as well as to 'increased business investment'. The ECB forecasts growth of 0.7 per cent in 2024 (revised down from 0.8 per cent in September), 1.1 per cent in 2025 (from 1.3 per cent) and 1.4 per cent in 2026 (from 1.5 per cent). The estimate for 2027 is 1.3%.
The ECB will continue to follow 'a data-driven approach whereby decisions are taken at each meeting,' the statement said. Lagarde explained that the uncertainty resulting from the political situation in the US and the EU was much discussed during the discussion. The reference was to the non-presentation of the budget in some member states, but also to possible tensions in international trade: 'Greater frictions in international trade would make the inflation outlook for the euro area more uncertain,' Lagarde explained.
