At the meeting of the ECB Council in Frankfurt, it was decided that the overnight deposit facility rate will be reduced by 0.25 percentage points to 3.5%. The deposit facility rate is the interest rate by which the Governing Council of the ECB determines the direction of its monetary policy stance.
The rate of main refinancing operations will be lowered by 0.6 percentage points to 3.65%, and the rate of overnight loans – by 0.6 percentage points to 3.9%.
The new rates will come into effect on September 18.
“Based on the Council’s updated assessment of the inflation outlook, the dynamics of core inflation and the power of monetary policy transmission, it is time to take another step towards reducing the level of monetary policy restrictions,” said the statement issued after the Council meeting.
It said that recently received inflation data was broadly in line with expectations, and the latest ECB staff options estimates confirmed the previous inflation outlook. Specialists predict that overall inflation will average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, just as it was expected in the June possibility estimates. Inflation is expected to pick up slightly again later this year, partly because the previous sharp declines in energy prices will no longer be reflected in the annual inflation rate. Inflation should then ease towards the target level in the second half of next year. Regarding the possibility of core inflation, the estimates for 2024 and 2025 have been adjusted and slightly increased due to the fact that service price inflation was higher than expected. At the same time, experts still expect a sharp drop in core inflation (from 2.9% this year to 2.3% in 2025 and 2% in 2026).
The Council notes that domestic inflation remains high, with wages still rising at an accelerated pace. However, labor cost pressures are becoming more moderate and earnings are partially limiting the impact of higher wages on inflation. Restrictive financing conditions remain and economic activity remains subdued, reflecting weak private consumption and investment. Specialists’ estimates predict that the growth of the national economy will be 0.8% in 2024 and will then become faster, reaching 1.3% in 2025 and 1.5% in 2026. This represents a slight downward revision from the June options estimate, mainly due to a weaker contribution from domestic demand over the next few quarters.
The Council states that it is committed to ensuring a timely return of inflation to its mid-term target of 2%. It promises to keep monetary policy interest rates at sufficiently restrictive levels for as long as necessary to achieve this goal. The Council’s approach to determining the extent and duration of restrictions will continue to be data-driven, with each meeting making a decision. More specifically, its decisions on interest rates will depend on the assessment of the inflation outlook, taking into account the received economic and financial data, core inflation dynamics and the power of monetary policy transmission. The Council does not commit in advance to move interest rates in a specific direction, the statement emphasized.
As announced on March 13, some changes in the operating principles of monetary policy implementation will come into effect on September 18. More specifically, the spread between the interest rate of the main refinancing operations and the interest rate of the deposit facility will be set at the level of 15 basis points. The difference between the interest rate of the overnight loan option and the interest rate of the main refinancing operations will not change (25 basis points), the statement recalled.
It has already been reported that rates were left unchanged at the previous meeting in July, but before that, all three rates were cut by 0.25 percentage points at the meeting in June.
In order to combat high inflation, the ECB Council gradually raised interest rates to record highs for ten consecutive meetings from July 2022 to September 2023, but then kept them unchanged.
According to “Eurostat” data, the annual inflation in the Eurozone decreased to 2.2% in August compared to 2.6% in July, thus the lowest level was recorded since July 2022.
2024-09-13 08:36:02