ECB cuts rates by 0.25 points. “Appropriate to moderate the degree of monetary policy tightening”

Brussels – In the end, everything is per rumours, expectations, and program: the ECB decrees an interest rate cut. The European Central Bank Governing Council holds on to the monetary policy easing hypothesis for this month’s meeting with a reduction of 0.25 basis points. Thus, the interest rate on the primary refinancing operations falls to 4.25 per cent, the interest rate on the marginal lending facility to 4.5 per cent, and the interest rate on the deposit facility falls from 4 to 3.75 per cent. 

For the Eurotower, the conditions are such that the decision is justified. Since the September 2023 Governing Council meeting, inflation has fallen by more than 2.5 percentage points, and the inflation outlook has “significantly improved.” Core inflation has also eased, reinforcing signs that price pressures are weakening and inflation expectations are declining over all horizons. Eurotower analysts now forecast overall inflation to average 2.5 per cent in 2024, 2.2 in 2025, and 1.9 in 2026.

For this reason, based on an updated assessment of the inflation outlook, core inflation dynamics, and the strength of monetary policy transmission, the ECB explains, in the note accompanying the decision, that “it is now appropriate to moderate the degree of monetary policy tightening after nine months of holding rates steady.”

The ECB President, Christine Lagarde, plays it safe: this is not the beginning of continued easing. No further cuts are planned at this time. “We are not committing to a particular path,” she clarifies. From now on, “we will need data, data and data analysis” to decide and possibly proceed with a new rate cut. Translated, “We will decide based on the data and a case-by-case basis.” 

Lagarde confirms that the current situation warrants “an easing” of monetary policies that “remain restrictive” and will “remain restrictive for as long as it takes” to return to the 2 per cent inflation target. But there is a global backdrop cloaked in uncertainties, with “downside risks for the medium term” posed by the possibility of a weaker-than-expected global economy, new and additional trade tensions, and conflicts in Ukraine and the Middle East.”There are still obstacles along the way, which we may well anticipate but whose impact we do not know.”

These external factors could again affect inflation and growth. Regarding growth, Frankfurt’s expectations are now +0.9 per cent for 2024, +1.4 for 2025, and +1.6 in 2026, confirming the business world’s expectations.

Hence, a move forward with caution, still respecting the independence inherent in the Frankfurt institution. The ECB thinks in these terms, with Lagarde assuring that she does not intend to be influenced. “Markets do what they must, and we do what we must.” Based on this approach, national governments are also asked to do their part. The ECB president renews a new call for reforms, spending restraint, implementing green and digital transitions and, “without delay”, the rules of the new stability pact.