2024-09-13 10:35:18
The Governing Council of the European Central Bank (ECB) decided this Thursday to stick to the script and lower interest rates by 25 basis points, so that the deposit rate (DFR) remains at 3.50%.
The interest rates applicable to the main refinancing operations (MRO) and the marginal lending facility (MLF) will be reduced to 3.65% and 3.90%, respectively. These changes will come into effect from 18 September 2024.
As a result, the difference between the deposit rate and the MRO rate will be equal to 15 basis points and the difference that will be maintained with MLF is a quarter point.
As the analysts consulted by Europa Press assumed, the ECB has resumed its cycle of monetary flexibility after pausing it at its meeting in July, when it chose to maintain the price of money.
“Based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the severity of monetary policy transmission, it is now appropriate to take a further step to ease the degree of monetary tightening.
The organization led by Christine Lagarde has revealed that internal inflation remains “high” due to the “high” pace at which salaries are growing. However, labor cost pressures are easing and profits are partially easing the impact of wage increases on inflation.
Financing conditions continue to be “restrictive”, and economic activity is still “in check” reflecting the weakness of private consumption and investment.
No commitment to a “specific rate path”
In addition, the ECB recalled that it remains “certain” to return inflation to the 2% objective in the medium term, and rates will be kept at “sufficiently restrained” levels for as long as necessary. Likewise, in future appointments these will be set with a data-driven approach and aggregated.
From Frankfurt they will pay particular attention to the assessment of the inflationary expectation, the dynamics of the basic inflation and the intensity of the transmission of the monetary policy, and, all, “without committing in advance to any particular path of rates.”
The changes announced include the technical modification announced by the ECB in March which will come into force on 18 September. In this way, the deposit rate is the ‘de facto’ reference rate in determining the interest that financial institutions receive, or pay if it is negative, for keeping their deposits at the ECB.
Previously, the refinancing rate was a variable that was more important when informing the ECB’s monetary policy decisions. However, this lost relevance over time due to excess liquidity in the financial system, as a result of greater access by banks to ECB funds, which led to entities making greater use of deposits.
The final objective of the adjustment is to align short-term interest rates in the money market with the decisions of the Governing Council, as well as to withdraw excess liquidity from the system so that it does not affect the proper transmission of monetary policy.
Regarding the asset purchase programs (APP) and the pandemic emergency purchase program (PEPP), the ECB has indicated that the former will continue to be reduced at a “measured and predictable” pace, putting including the reinvestment of the principal amount of the maturing securities.
In the case of the latter, the Eurosystem has ended the reinvestment of the entire principal amount of the amount received at maturity. The reason for this is that the PEPP portfolio will decrease per month on average by around 7.5 billion euros. The Governing Council intends to end these reinvestments at the end of 2024.
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