The European Central Bank (ECB) announced on Thursday the cut of three key interest rates by 25 basis points (0.25%) factoring in the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.
It is the fourth cut of interest rates by Europe’s central bank, a move expected by the markets and financial analysts leading to the rate settling at 3%.
Markets and economists were eagerly awaiting the central bank’s projections on the trajectory of the European economy’s growth, which would provide insight alongside the rhetoric to be adopted by Christine Lagarde during the customary press conference. According to the European Central Bank’s announcement, the central bank has revised its GDP forecasts for the Eurozone downward.
In its statement, the Governing Council said the disinflation process is well on track. Staff see headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026, and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff projects an average of 2.9% in 2024, 2.3% in 2025, and 1.9% in both 2026 and 2027.
Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis. Domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.
Financing conditions are easing, as the Governing Council’s recent interest rate cuts gradually make new borrowing less expensive for firms and households. But they continue to be tight because monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit.
