More confident about the downward trend of inflation and looking for a soft landing for the eurozone economy, the European Central Bank (ECB) decided this Thursday to make a new cut of 0.25 percentage points in the main reference interest rate.
Meeting market expectations, the central bank’s deposit interest rate – currently the reference for funding costs in the eurozone – has been set at 3.5%.
After drastically raising its interest rates from -0.5% to 4% between July 2022 and September 2023 to combat rising inflation, the entity led by Christine Lagarde began easing monetary restrictions slightly on the economy last June, lowering the deposit interest rate from 4% to 3.75%.
At the meeting held in July, ECB officials decided to keep the cost of money in the eurozone unchanged, but now, after seeing inflation drop from 2.6% to 2.2% in August, they have lowered interest rates again.
In the announcement regarding the decision, the new interest rate cut is justified by the “dynamics of underlying inflation,” which makes “it appropriate to take a new step in moderating the degree of restriction in monetary policy.”
At this meeting, as had already been anticipated by the monetary authority, the ECB also made a slight adjustment to the differentials between the key interest rates. Thus, contrary to usual practice, the refinancing rate and the liquidity offering facility rate recorded different variations from the deposit interest rate, being cut by 0.6 percentage points, to 3.65% and 3.9%, respectively.
However, it is the ECB’s deposit interest rate that serves as a reference for the financing costs practiced in the economy, particularly reflected in the level of Euribor interest rates, which serve as a reference for most loans, especially for housing, granted in Portugal. In recent months, Euribor interest rates have been on a downward trend, justified by the expectation of interest rate cuts by the ECB.
Revised Down Growth Forecasts
Attention has now turned to what the ECB will do in the coming months. After the interest rate cut made this Thursday, the central bank officials have two more meetings scheduled for the end of the year – one in October and another in December – and the question is whether the ECB will accelerate the pace of cuts, with two cuts in the two meetings or whether it will maintain the same pace, with one cut just three months later, in December.
For now, the clues given are few. In the announcement made this Thursday, it is reiterated that central bank officials remain “determined to ensure that inflation returns to the medium-term target of 2%” and that, to achieve this, they will “keep interest rates at a sufficiently restrictive level for as long as necessary.” The approach going forward will, they assure, continue to be “data-dependent,” deciding “meeting by meeting.”
Complicating a quicker interest rate cut are concerns about the impact that wage increases may have on inflation. The ECB states that “domestic inflation remains high and wages are still rising at a rapid pace.” However, in return, it is acknowledged that labor costs “are slowing” and economic activity “is weakening.”
In the new macroeconomic projections released this Thursday, the ECB maintained the same forecast for inflation this year and in the two following years: 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, but slightly revised upward the projection for underlying inflation, which excludes the analysis of more volatile price goods like food and fuels.
Regarding the pace of economic activity, the ECB has cut 0.1 percentage points from the growth forecasts for each of the three years, now predicting a GDP variation of 0.8% this year, 1.3% next year, and 1.5% in 2026.