ECB / Cuts interest rates by 25 basis points

The reduction of interest rates by 25 basis points the European Central Bank decided, thus dropping the interest rate from a historic high of 4% to 3.75%.

After nine months, the ECB decided to moderate inflationary pressures in this way in response to the markets’ constant demand for monetary policy easing.

It is worth noting that this is the first reduction of its interest rates from the 2019.

We cut our key interest rates by 0.25 percentage points.

Keeping interest rates high for nine months has helped push down inflation.

It is now appropriate to moderate the degree of monetary policy restriction.

Read our monetary policy decisions pic.twitter.com/dTTYKg7itm

— European Central Bank (@ecb) June 6, 2024

The rationale for the decision

The Governing Council decided today to cut the three main interest rates of the ECB by 25 basis points. According to the updated assessment of the outlook for inflation, the dynamics of core inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy accommodation after nine months of holding interest rates. Since the September 2023 Governing Council meeting, inflation has declined by more than 2.5 percentage points and the outlook for inflation has improved significantly. Core inflation has also eased, reinforcing signs that price pressures have eased, and inflation expectations have eased across the board. Monetary policy has kept financing conditions tight. The curbing of demand and the stabilization of inflation expectations have contributed significantly to the return of inflation to lower levels.

At the same time, despite the progress made in recent quarters, domestic price pressures remain strong as the pace of wage growth is elevated, and inflation is likely to remain above target for much of next year as well. The latest Eurosystem staff projections for headline and core inflation have been revised upwards for 2024 and 2025 compared to the March projections. Experts now expect headline inflation to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. Inflation excluding energy and food is expected to to average 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. The rate of economic growth is expected to accelerate to 0.9% in 2024, 1.4% in 2025 and 1, 6% in 2026.

The Governing Council is determined to ensure that inflation returns to its medium-term target of 2% in time. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this objective. The Governing Council will continue to take an evidence-based approach and make decisions on a meeting-by-meeting basis to determine the appropriate extent and duration of the contractionary change in monetary policy. In particular, its interest rate decisions will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the intensity with which monetary policy is transmitted. The Board of Directors does not commit in advance to a specific course of interest rates.

The Governing Council also confirmed today that it will reduce the securities held by the Eurosystem under the Pandemic Emergency Asset Purchase Program (PEPP) by €7.5 billion per month on average in the second half of this year. The detailed terms of this reduction will generally be similar to those that applied to the asset purchase program (APP).