This is the second cut in the key interest rates in the Eurozone since June by the European Central Bank (ECB), providing relief from the restrictive monetary policy that has been in place since 2022. However, future decisions remain uncertain.
After today’s meeting on September 12, of the ECB’s Governing Council, the decision on interest rates matches market and analyst expectations: the key interest rates in the Eurozone will indeed see another decrease.
“Considering the updated assessment conducted by the ECB Council regarding inflation prospects, underlying inflation dynamics, and the strength of monetary policy transmission, it is now appropriate to take another step towards moderating the degree of restrictiveness of monetary policy,” can be read in the statement released by the European institution.
Unlike the historic first cut in June 2024, this time the key rates are being reduced at different paces:
- The deposit facility rate has the smallest cut, of 25 basis points (0.25 percentage points): it decreases from 3.75% to 3.50%.
- The main refinancing operations rate decreases by 60 basis points (0.60 percentage points): from 4.25% to 3.65%.
- The liquidity providing facility rate also decreases by 60 basis points (0.60 percentage points): from 4.50% to 3.90%.
The differentiated reduction between rates reflects the ECB’s technical strategy, announced in March 2024, to maintain the difference between the refinancing rate and the deposit rate fixed at 15 basis points. The differential between the refinancing rate and the liquidity providing rate remains unchanged at 25 basis points.
The changes in key rates will take effect from September 18.
An Expected Decision
After a first interest rate cut decided in June 2024 (followed by a pause in July), the decision for a second cut in today’s meeting was already anticipated.
The basis for the decision (and the expectations before the meeting) is the decrease in inflation, but also the performance of the Eurozone economy.
The indicators continue to reinforce the downward trend in inflation: the Eurozone Consumer Price Index was 2.2% in August 2024, meaning the lowest level in three years (the peak was in October 2022, when the inflation rate reached 10.6%).
Still, underlying inflation (excluding food and energy components) is more resistant to decreases, especially due to rising service prices.
According to the ECB’s statement, “experts project that overall inflation will average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, in line with the projections made in June.” At the same time, the institution notes that “internal inflation remains high because wages continue to increase at a fast pace,” “financing conditions remain restrictive, and economic activity is still moderate, reflecting weakness in private consumption and investment.”
The experts’ projections mentioned in the statement indicate that “the economy will register a growth rate of 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026.”
Despite the reduction in inflation, interest rates remain at historically high levels and the ECB’s decision does not imply an abrupt turn in the Central Bank’s restrictive policy. It is more of a gentle easing than a change in strategy.
The second European cut comes ahead of any reduction in key rates by the United States. Still, the chairman of the Federal Reserve (Fed), Jerome Powell, has already indicated that the moment has come to cut rates, and likely the first cut will be made at the Fed meeting this month (September 17 and 18).
Next Decisions
After today’s cut, what will the timeline for future decisions on key rates look like?
As has been customary in past meetings, the ECB opts not to commit to a specific schedule for cuts and maintains a data-dependent approach: “The ECB’s decisions on interest rates will be based on the assessment of inflation prospects in light of the economic and financial data made available, the dynamics of underlying inflation, and the robustness of monetary policy transmission.”
Nevertheless, the institution led by Christine Lagarde issues a warning: “The ECB Council is determined to ensure the timely return of inflation to its medium-term objective of 2%. To this end, it will maintain key interest rates sufficiently restrictive for as long as necessary.”
Euribor Rates Continue to Decrease
Given the influence of key rates on Euribor rates, this cut is also a positive sign that mortgage payments (variable rate) could be alleviated.
Current data shows that Euribor rates reflect this gradual downward trend of the ECB, with relief in mortgage payment revisions. The 12-month Euribor fell below 3% this week and is at a minimum of over a year and a half. The 6-month Euribor is also at a minimum since March 2023, just above 3.26%.
The Euribor represents the average rates at which a group of banks in the Eurozone lend money to each other in the interbank market. By lowering the key interest rate, the ECB reduces the interest rate at which it lends money to commercial banks, generating a domino effect across all other interest rates.
ECB Reduces Interest Rates Again was last modified: September 12th, 2024 by