Today the Governing Council decided to cut all three key ECB interest rates by 25 basis points. Therefore, the expectations of the market participants were fulfilled. In addition, it was announced that the balance sheet of the Central Bank will be further reduced and the annual inflation forecasts will be increased.
It was the first reduction in borrowing costs for the three since 2016, driven by a significant slowdown in inflation to less than half last year's level.
"Taking into account the latest assessment of the inflation outlook, the dynamics of core inflation and the strength of the transmission of the effects of monetary policy, the Governing Council notes that now is the right time to ease restrictive monetary policy. The level of interest rates has not been changed for nine months," the ECB statement reads.
It is noted that during the period from the meeting of the Governing Council in September 2023, inflation has decreased by more than 2.5 percentage points, and the inflation outlook has noticeably improved. Core inflation also fell, further confirming that price pressures have eased and inflation expectations for all time horizons have fallen. Due to the ongoing monetary policy, financing conditions were tight. This dampened demand and supported stable inflation expectations, thereby contributing significantly to reducing inflation.
Thus, the base interest rate of the European Central Bank decreases to 4.25 percent, the marginal borrowing rate to 4.5 percent, and the interest rate of commercial banks held by the Central Bank will be 3.75 percent. These interest rates will be applied from June 12, 2024.
"The Governing Council is committed to ensuring that inflation returns to the target level of 2 percent over the medium term in time. It will keep monetary policy interest rates at sufficiently restrictive levels for as long as necessary to achieve this objective. Decisions regarding the appropriate level and duration of restriction will continue to be made by the Governing Council on a case-by-case basis, based on available data. First of all, it will take decisions on interest rates after assessing the inflation outlook, taking into account the economic and financial data received, the evolution of core inflation and the extent of transmission of monetary policy effects. The Governing Council is not pre-committed to following any specific direction of interest rate development" – declare the executors of the euro zone's monetary policy.
Today, the Governing Council of the ECB also confirmed that in the second half of this year, it will issue 7.5 billion euros per month. will reduce the portfolio of Eurosystem securities purchased under the Special Pandemic Purchase Program (SPPP). The procedure for reducing the SPPP portfolio will basically correspond to the procedure used for reducing positions of assets purchased under the asset purchase program (TPP).
"The TPP portfolio is shrinking at a set and predictable pace, as the Eurosystem no longer reinvests the principal amounts received from the securities as they mature. The Governing Council will continue to reinvest all principal amounts received from the redemption of securities purchased under the SPPP as they mature until the end of June 2024. The Governing Council intends to end reinvestment under the SPPP at the end of 2024. It will continue to follow the principle of flexibility in reinvesting the amounts received from the redemption of securities purchased under the SPPP when they mature, in order to reduce the risks related to the pandemic to the monetary policy transmission mechanism," the ECB said in a statement.
As banks repay funds borrowed through targeted longer-term refinancing operations, the Governing Council will regularly assess the impact of targeted lending operations and the repayment of amounts borrowed under them on its monetary policy stance.
It is emphasized that the Governing Council is ready to adjust all the measures available in accordance with the powers granted to it, so that inflation returns to the target level of 2 percent in the medium term, and to ensure the smooth transmission of the effects of monetary policy. In addition, a policy transmission buffer can be used to combat unwanted, disorderly market developments that could seriously disrupt the transmission of monetary policy across euro area countries. This would help the Governing Council to more effectively exercise its mandate to ensure price stability.
However, despite the progress made in recent quarters, fast wage growth is contributing to strong domestic price pressures, so inflation is likely to exceed the target level well into next year. Compared to the March forecasts, the latest forecasts of both general and net inflation in 2024 and 2025 prepared by Eurosystem experts have been increased. Annual price growth this year and next year will be 0.2 percent higher than expected in March, reaching 2.5 percent and 2.2 percent, respectively, according to the ECB. Meanwhile, in the case of annual core inflation, expectations have been raised by 0.2 percent to 2.8 percent and by 0.1 percent to 2.2 percent, respectively.
As for euro zone economic growth, the forecast for 2024 has been raised by 0.3 percent to 0.9 percent, and next year has been cut by 0.1 percent to 1.4 percent. Unemployment is also now expected to be lower, at 6.5 percent this year and next, or 0.2 and 0.1 percent less than previous forecasts.
During the press conference, the head of the European Central Bank, Christine Lagarde, reiterated that further decisions in the field of monetary policy will depend on the arrival of the latest various macroeconomic data, ie inflation, wage changes and others.
She emphasized that today's decision to ease the monetary policy, which was unanimous with the exception of one member of the ECB Council, was determined not so much by the latest data, but by the totality of all indicators and trends since September of last year, which show the processes of inflation reduction. At the same time, it was emphasized that the further path of inflation, that is, its decline, according to monetary policy makers, will not be smooth.
"Are we moving today towards a gradual unwinding of the restrictive monetary stance? I wouldn't say so. We need further data analysis to confirm that we are still on the path of disinflation. I cannot confirm that we are on the path that started this process. It is not clear at what speed we will move or how long this process will take," said Christine Lagarde.
The next meeting of ECB representatives on monetary policy issues is scheduled for July 18 in Frankfurt.
