In spite of the recent fluctuations, the inflation in the euro area appears to be checked within the ECB’s expectation, keeping the door open for more rate cuts in the coming months.
FRANKFURT, Dec. 13 (Xinhua) — The European Central Bank (ECB) on Thursday decided to cut its key interest rates by 25 basis points at its last rate-setting meeting this year.
As much as the central bank is reluctant to relinquish its data-dependency and meeting-by-meeting approach in its rate decisions, it has already lowered rates four times this year, by a 25-basis-point cut each time.
ECB President Christine Lagarde insisted that the fight against inflation, which has topped the agenda of the central bank for several years, has yet to come to an end. In spite of the recent fluctuations, the inflation in the euro area appears to be checked within the ECB’s expectation, keeping the door open for more rate cuts in the coming months.
CAUTIOUS CUTS
With the latest cut, the ECB has cut down the key interest rates by a total of 100 basis points since June.
Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will decrease to 3, 3.15, and 3.4 percent respectively, starting from Dec. 18, said the central bank in a statement.
In June, the ECB began pull-back from its ultra-restrictive monetary stance marked by historically high interest rates after an unprecedentedly aggressive rate hike cycle.
To tame rampant prices in the euro area, the ECB embarked on an unorthodox cycle of rate hikes in July 2022, raising rates by 450 basis points after 10 hikes.
The interest rate on the deposit facility was pushed up to 4 percent by September 2023 and was kept unchanged until June this year.
INFLATION INCHING DOWN
“In particular, the decision to lower the deposit facility rate — the rate through which the Governing Council steers the monetary policy stance — is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission,” the ECB noted in the statement.
Even if inflation in the euro area rebounded in November for the second month in a row, going up to 2.3 percent from 2 percent in October, measures of underlying inflation indicate that the inflation is inching down to the target level of 2 percent on a sustainable basis.
The euro area inflation peaked at 10.6 percent in October 2022 and gradually came down to 2.9 percent in December 2023 as the restrictive monetary policy gradually found its way into the financial system.
The euro area inflation decreased to 1.7 percent in September this year, the lowest level since April 2021.
In the latest edition of the ECB staff projections, inflation in the euro area is projected to be 2.4 percent in 2024, 2.1 percent in 2025 and 1.9 percent in 2026.
FLAGGING ECONOMY
“The disinflation process is well on track,” Lagarde told a press conference, noting that some of the rate-setters proposed a cut larger than 25 basis points on concern that the economic recovery in the euro area is losing steam.
However, most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2 percent medium-term target on a sustained basis, the bank said.
The ECB conceded the economic recovery is slowing down, as indicators show, in the last quarter of this year. The economy grew by 0.4 percent in the third quarter.
The central bank struck a positive tone about the economic growth. “Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand,” it said.
The ECB staff slightly lowered their growth projections, expecting the euro area economy to grow by 0.7 percent in 2024, 1.1 percent in 2025, and 1.4 percent in 2026.
Carsten Brzeski, global head of Macro for ING Research, commented in a note that the ECB is “on its way towards neutral interest rates.”
While there is hardly a consensus about neutral interest rates, which are defined as rates neither spurring nor restricting the economy, Lagarde said the ECB staff reckon the neutral rates lie between 1.75 and 2.5 percent.
“Given the high risk that its growth outlook is too optimistic, at least in the short term, going to neutral might not be enough,” said Brzeski.
