The European Central Bank’s (ECB) Governing Council has announced a 25-basis point reduction of the rate for the deposit facility, bringing the rate down to 3.50% as of September 18, 2024.
The ECB continues to strive for a positive influence on monetary policy and economic growth in the Eurozone.
The ECB also lowered other important interest rates. Primary refinancing will now be at 3.65% and the marginal lending facility will drop to 3.90%.
Spread between main refinancing and deposit facility rates will be set at 15 basis points. The spread between marginal lending and main refinancing remains the same, 25 basis points.
The adjustment is intended to increase the banks’ margins on lending, which will boost economic activity and consumer confidence.
Asset Purchase Programme (APP) adjustments
The ECB has also recalibrated its asset-management strategies.
As the Eurosystem stops reinvesting principal payments of maturing assets, there is a decrease in the APP portfolio.
This shift in strategy is a step towards maintaining financial stability and reversing the previous policies of expansion.
In addition, the ECB stopped reinvesting principal from its Pandemic Emergency Purchase Programme. This resulted in a portfolio decrease of EUR 7.5 billion on average per month.
Reinvestments in PEPP should be complete by 2024. This will reflect a shift to a normalized monetary policy.
The ECB closely monitors the repayments for targeted longer-term financing operations (TLTROs).
The ECB has a proactive approach in managing the financial system, and this scrutiny will help assess the effect of liquidity on Eurozone bank’s health as well as the overall economy.
The Governing council remains committed to using a range of tools to achieve inflation targets and support the economic recovery in the Eurozone.
Lagarde and de Guindos: policy decisions
ECB Vice President Luis de Guindos and President Christine Lagarde announced the rate reduction of 25 basis points, stating that it was based upon a revised evaluation of inflation expectations and monetary policies effectiveness.
Lagarde said:
It is reasonable to reduce the level of restrictions on monetary policy, given our latest assessment of inflation and its dynamics.
Lagarde stated that core inflation will decline from 2,9% in 2020 to just 2.0% in 2026. While headline inflation is forecast to be 2.5% by 2024, it is 2.2% by 2025 and 1.9% by 2026.
The impact of inflation is being cushioned by profits, despite a temporary increase in inflation caused by the prior decline in energy prices.
The ECB predicts a weak growth rate of only 0.8% by 2024. This will improve to 1.3% by 2025, and then 1.5% by 2026.
Central bank officials remain committed to maintaining the restrictive policy rate necessary to meet its medium-term target of 2% inflation. They use a data driven approach to identify optimal levels and durations for monetary restrictions.
The post European Central Bank cuts interest rates, reduces growth forecasts by the European Central Bank may be updated as new information becomes available.
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