In view of the decreasing risk of inflation, the European Central Bank is cutting its policy rate again after the monetary policy change in June. The deposit rate, which is crucial for the financial markets and where banks park excess short-term funds with the ECB, was cut by a quarter of a percentage point to 3.5 percent on Thursday. The financial markets had expected this.
At the same time, the monetary authorities around ECB boss Christine Lagarde are leaving it unclear what will happen in terms of monetary policy just a few weeks before the next meeting in October: “The ECB Council is not committing to a specific interest rate path in the future. advance.”
Expert warns: “Inflation remains high”
The CEO of the General Association of the German Insurance Industry, Jörg Asmussen, called the rate cut a positive and reassuring signal to the markets: “Nevertheless, the ECB must continue to show tact. On the one hand, we continue to see high inflation rates in the services sector, so that the inflation rate could prove to be persistent in the future.” On the other hand, the ECB must not miss the right timing of further rate steps, the former member of the ECB Executive Board explained.
The ECB wants to create incentives for credit transactions
The decision will reduce the main refinancing rate at which commercial banks can borrow money from the ECB for a week by 0.6 percentage points to 3.65 percent. The fact that the cut is larger than the deposit rate is the result of changes the ECB made in the spring. At that time, it decided to reduce the gap between the deposit rate and the main refinancing rate. The ECB wants to create incentives for participation in its weekly lending operations while limiting the size of fluctuations in market rates.
If short-term interest rates fluctuate too much, the head of the German Bundesbank, Joachim Nagel, could distort the signal about the intended course of monetary policy, which would eventually undermine its effectiveness. However, the deposit rate remains the central monetary policy rate. Because it sets the lower limit on the money market: the lowest interest rate at which banks can borrow money from each other.
Loans could soon become cheaper
Eurozone banks still have around €3 trillion of surplus liquidity that they can park with the ECB. Over time, this is likely to decline and banks will be able to borrow more money from the ECB. The narrower interest rate corridor is intended to help the ECB better control market rates. The interest rate cuts generally make it cheaper for companies to borrow, while savings deposits such as overnight or term deposits yield less. Before the rate cut in June, the central bank had kept interest rates high for a long time in the fight against inflation to keep inflation in the eurozone under control.
Falling energy prices pushed inflation to 2.2 percent in August – the lowest level in more than three years. As in the June projections, the ECB experts now expect headline inflation in the euro area to reach 2.5 percent this year and fall to 2.2 percent in 2025. In 2026, it should be 1.9 percent.
Inflation is likely to rise again
However, ECB experts expect inflation to rise again in the second half of this year. This is partly due to the fact that previous sharp falls in energy prices have been excluded from the annual figures: “Inflation should then decline towards our target in the second half of next year.”
The central bank economists also expect economic growth in the eurozone of only 0.8 percent this year. Gross domestic product is expected to rise by 1.3 percent in 2025 and 1.5 percent in 2026. In June, the ECB economists were still expecting values of 0.9 percent for 2024, 1.4 percent for 2025 and 1.6 percent for 2026.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
