The European Central Bank (ECB) has announced a 25 basis point reduction in its key deposit rate, lowering it to 3.5% from 3.75%. This marks the second rate cut of 2024 and comes in response to cooling inflation and concerns about economic growth in the eurozone. ECB President Christine Lagarde stated, ‘We are not committing ourselves in advance to a particular path of interest rates,’ emphasizing the bank’s data-dependent approach.In addition to the deposit rate cut, the ECB has made a technical adjustment to its interest rate corridor. The main refinancing rate has been reduced by 60 basis points to 3.65%, and the marginal lending rate has been lowered by 60 basis points to 3.9%. This adjustment aims to reduce short-term interest rate volatility and increase the flexibility of banks in their planning.The ECB has revised its economic growth forecasts downward, now projecting eurozone growth of 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026. Despite these reductions, the ECB maintains its inflation projections, expecting inflation to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026.Market reactions to the ECB’s decision have been mixed. Some analysts, like Janet Mui, expect ‘close to two more rate cuts by the end of the year and a further four cuts in 2025’. However, others are more cautious, with traders now predicting only 33 basis points of additional easing by year-end, down from 36 basis points before the meeting.The ECB’s decision comes as inflation in the eurozone has slowed to 2.2% in August, approaching the bank’s medium-term target of 2%. However, Lagarde cautioned that the bank remains vigilant about inflationary pressures, particularly in the services sector and wage increases.Looking ahead, the ECB has emphasized its commitment to a data-dependent approach. Lagarde stated, ‘We will continue to follow a data-dependent approach and take decisions at each meeting’. This stance leaves open the possibility of further rate adjustments based on economic developments in the eurozone, with the next ECB meeting scheduled for October 17.
Key points
- ECB cuts key deposit rate by 25 basis points to 3.
- Technical adjustment made to interest rate corridor, reducing main refinancing rate by 60 basis points.
- ECB revises economic growth forecasts downward but maintains inflation projections.
- Market expectations for future rate cuts vary, with some analysts predicting more cuts while others are cautious.
- ECB emphasizes data-dependent approach for future monetary policy decisions.
5%.
Contradictions👾There are conflicting views on the likelihood of further rate cuts, with some analysts expecting more cuts while others, including ECB sources, suggest an October rate cut is unlikely unless there’s significant economic deterioration.
