As expected, the ECB cut its benchmark deposit rate by a quarter percentage point to 3.75% from an all-time high of 4%. The interest rate on its main refinancing operations was also reduced by 25 basis points to 4.25%, while the rate of its marginal lending facility was lowered similarly to 4.50%.
But uncertainty hovered around how officials will approach future potential reductions later in 2024, with the ECB saying that it is “not pre-committing to a particular rate path.”
Instead, the central bank said it will keep policy rates “sufficiently restrictive for as long as necessary” to ensure that price gains reliably cool to its 2% medium-term target. It added that the rate-setting Governing Council will stay “data-dependent” and take a “meeting-by-meeting” approach to rate decisions.
In the build-up to the gathering, several officials strongly suggested that the ECB would bring down rates, citing signs of abating inflation in the euro zone currency area.
ECB President Christine Lagarde said in May she believes price pressures are “under control,” particularly as the impact of an energy crisis and supply chain constraints fades. Philip Lane, the central bank’s Chief Economist, also told the Financial Times in an interview that “barring major surprises” officials see enough in recent data “to remove the top level of restriction.”
The comments were echoed in the ECB’s latest assessment of inflation. The ECB said it is “now appropriate” to moderate the degree of policy restriction after holding rates steady for nine months because of a “markedly” improved inflation outlook.
“Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons,” the ECB said in a statement.
However, it flagged that inflation is likely to stay above 2% “well into next year” due to “domestic price pressures” fueled by elevated wage growth. The ECB now expects headline inflation to average 2.5% in 2024 and 2.2% in 2025, before decelerating below its objective to 1.9% in 2026.
The ECB has become one of the biggest central banks yet to cut interest rates following a period of policy tightening around the world that was aimed at quelling runaway prices.
Officials at the Federal Reserve have indicated that they would like to see more evidence of easing inflation in the U.S. before backing any cuts, but labor market data points this week have bolstered hopes the Fed could roll out a reduction as soon as September.
Analysts at ING said in a note following the announcement that the ECB’s decision was “unique” as it was “one of the very few times” where it made a policy turn before the Fed.
“What the rate cut does show is change within the ECB itself: the ECB has regained confidence in its own forecasting skills and takes enough comfort from the benign inflation forecast from the second half of 2025 onwards to justify cutting rates,” the ING analysts said.
Source: Economy - investing.com
