2024-09-12 14:19:15
The European Central Bank is expected to make an unusual move today: It will reduce its three main interest rates by different percentages.
“Although he will cut the deposit rate for the second time by 25 basis points to 3.5%, which has been the benchmark for the cost of money for years – he will put a new regime into effect at today’s meeting: They will reduce by 60 basis points the other two rates: The main refinancing rate (currently 4.25%) and that of the marginal financing facility (currently 4.5%), which the ECB charges banks for money lending transactions, by a higher amount.
This move is due to the planned technical adjustment of the new “operating framework” announced by the ECB in March.
The head of the ECB Christine Lagarde had announced that it would adjust the operational framework of monetary policy to changing monetary conditions and, to that end, reduce the gap between the deposit rate and the main refinancing rate from 50 to 15 basis points.
“The interest rate on deposits that also concerns savers is currently 3.75% and is expected to decrease to 3.25% by the end of the year”, market players explain to Nautemporiki. “The European Central Bank has decided to reduce the difference between the three interest rates, with the aim of trying to make its monetary policy more effective.”
Deposit facility
The deposit facility is now the most important key money market rate. “The aim of this asymmetric reduction in interest rates is to relieve pressure on the money market, in which banks borrow money from central banks or from each other,” the same sources said.
Financial institutions are currently hoarding around €3.1 trillion in their ECB accounts. When refinancing loans to companies and private households, they are therefore not dependent on lending transactions with the ECB. As a result, the key refinancing rate currently plays no role for banks as an interest rate for classic money lending transactions.
“The European Central Bank, to ensure that the withdrawal of liquidity does not create tensions and violent fluctuations in interest rates in the interbank market, wants to give banks incentives to borrow money again from the ECB, if necessary, at an attractive rate of just 15 points basis above the deposit rate,” market players note. “Therefore, Christine Lagarde should stress that the asymmetric cut in key rates does not represent an unexpectedly strong easing of monetary policy, and point out that the key interest rate relevant to borrowers and investors remains the deposit rate for now.”
What do the markets expect?
Financial markets expect the deposit rate to drop to 2.25% by the end of next year. It is not yet clear whether key interest rates will be cut again in October – most likely not. Markets estimate that the probability of this happening is around 40%. Much will depend on how the economic and inflation data develop. Lagarde recently emphasized that decisions on interest rates in the coming months will depend on the data and above all on the path of inflation reduction.
Wages and oil
Inflation in the eurozone it fell to 2.2% in August, bringing it closer to the ECB’s target of 2.0%. This was mainly a result of lower energy prices, which were down 3% compared to the previous year.
The price of Brent is currently close to $70 a barrel. The last time black gold was this cheap was late fall 2021. Cost pressure from wages has also eased slightly. In the second quarter, collectively bargained wages in the euro area rose by around 3.6%. Previous quarters had grown at rates between 4 and 5%.
However, productivity continued to weaken. In the second quarter, total hourly economic output in the euro area fell by 0.6% compared to the previous year. Unit labor costs increased by approximately 4.3%. They are likely to have contributed to the fact that service prices in the Eurozone have risen much more than the ECB would have liked, at 4.2%. If the combination of strong wage increases and shrinking productivity continues, cost and price pressures will remain high and limit the scope of the ECB’s interest rate policy.