Third Time This Year Following June and September
The European Central Bank (ECB) announced on the 17th (local time) that it will cut its key policy rates by 0.25 percentage points. This is the third rate cut decision this year, following those in June and September.
Christine Lagarde, President of the European Central Bank (ECB), is holding a press conference at the ECB headquarters in Frankfurt, Germany, on the 12th (local time). [Image source=Reuters Yonhap News]
AFP reported that the ECB will lower the deposit rate, main refinancing rate, and marginal lending rate each by 25 basis points starting from the 23rd. This is the first time in 13 years, since December 2001, that the ECB has cut rates in two consecutive moves.
Accordingly, the deposit rate will be lowered to 3.25%, the main refinancing rate to 3.40%, and the marginal lending rate to 3.65%.
The ECB’s active rate-cutting stance is seen as signaling a shift in the ECB’s policy focus from inflation easing to economic growth.
On the day, the ECB held a monetary policy meeting in Ljubljana, Slovenia, and announced that the deposit rate would be lowered from the previous 3.50% per annum to 3.25%. The deposit rate is the interest rate applied when commercial banks deposit overnight funds with the ECB.
Additionally, the refinancing rate (Refi·MRO), which is applied when commercial banks borrow money from the ECB for one week, was lowered from 3.65% to 3.40%, and the marginal lending rate was cut from 3.90% to 3.65%. Among the three policy rates, the ECB plans its monetary policy mainly based on the deposit rate.
From July 2022 to September last year, the ECB raised rates a total of 4.50 percentage points over 10 consecutive hikes. After five rate freezes, it cut rates by 25 basis points each in June and September.
In a statement, the ECB said, "Information related to inflation shows that the disinflation (slowing of the inflation rate) process is progressing well," adding, "These inflation forecasts are also influenced by surprising downward movements in various economic activity indicators."
The consumer price index (CPI) inflation rate for the Eurozone (20 countries using the euro) in September, released on the day, was 1.7%, below the ECB’s target of 2%. It was even lower than the preliminary figure of 1.8%. This is the first time in 3 years and 5 months since April 2021 that the Eurozone inflation rate has fallen below 2%. In August, it was recorded at 2.2%.
The ECB warned, "Inflation may rise for a few months before falling to the target level next year."
Uncertain growth prospects for the Eurozone also played a role. Earlier, the ECB lowered its GDP growth forecast for this year from 0.9% to 0.8% due to decreased domestic demand. The forecast for next year was also revised down from 1.4% to 1.3%.
The Eurozone manufacturing Purchasing Managers’ Index (PMI) for September, which recorded 44.8?well below 50 and following the previous month’s 45.8?was also cited as a concern.
The ECB did not provide any clues about the possibility of further rate cuts at the next monetary policy meeting scheduled for December. Instead, it reiterated its existing stance that decisions will be made after reviewing newly added data.
Christine Lagarde, President of the ECB, said, "We do not pre-commit to a specific interest rate path."
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