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The ECB lowered interest rates for the second time (traders.lt)

ECB antrą kartą sumažino palūkanų normas (traders.lt)

The representatives of the European Central Bank, as expected, today decided to reduce their interest rates by another 25 basis points. This is the second haircut after the first in June. During the press conference, the head of the ECB made it clear that the interest rate cut at the next meeting in October is unlikely.

"Today, the Governing Council decided to reduce the interest rate for using the deposit facility by 25 basis points. It is the interest rate at which the Governing Council sets its monetary policy direction. Taking into account the Governing Council's latest assessment of the inflation outlook, the evolution of core inflation and the strength of the transmission of the effects of monetary policy, it is now appropriate to take another step towards easing the restrictive monetary policy," the ECB statement reads.

In addition, as announced on March 13 of this year, following a review of the operating system, a difference of 15 basis points was determined between the interest rate for the main refinancing operations and the interest rate for using the deposit facility. The difference between the interest rate for using the marginal borrowing facility and the interest rate for the main refinancing operations will not change and will be 25 basis points. Accordingly, the interest rate for using the deposit option will be reduced to 3.50 percent. The interest rate for the main refinancing operations and the interest rate using the marginal borrowing facility will be reduced to 3.65 percent and 3.90 percent, respectively. These changes will enter into force on September 18, 2024.

"The Governing Council is committed to ensuring that inflation returns to the target level of 2 percent in time over the medium term." It will keep monetary policy interest rates at a sufficiently restrictive level for as long as necessary to achieve this objective. The Governing Council will continue to make decisions on the appropriate level and duration of restrictions on a case-by-case basis, based on available data. Its decisions on interest rates will primarily depend on its assessment of the inflation outlook, taking into account incoming economic and financial data, the dynamics of core inflation and the strength of monetary policy transmission. 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.

As for the Asset Purchase Program (APP), its 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 Eurosystem no longer reinvests all principal amounts received from the redemption of securities purchased under the Special Pandemic Purchase Program (SPPP) upon maturity. Thus, the SPPP portfolio is reduced after an average of 7.5 billion. euros per month. The Governing Council intends to end reinvestment under the SPPP at the end of 2024. The Governing Council will continue to maintain flexibility in the reinvestment of proceeds from the redemption of securities purchased under the SPPP upon maturity to mitigate pandemic-related risks to the monetary policy transmission mechanism.

At the same time, it is informed that when banks return funds borrowed during targeted longer-term refinancing operations, the Governing Council will regularly assess the impact of targeted lending operations and the return of amounts borrowed under them on its monetary policy position.

The ECB's statement emphasizes that the Governing Council is ready to adjust all measures available under its mandate to return inflation to its target level of 2 percent in the medium term and to ensure the smooth functioning of the monetary policy transmission mechanism. In addition, the policy transmission buffer can be used to contain unwarranted, disorderly market dynamics that pose serious risks to the transmission of monetary policy across the euro area, helping the Governing Council to exercise its mandate to ensure price stability even more effectively.

Representatives of the European Central Bank point out that the latest inflation data largely corresponded to expectations, and the latest ECB experts' forecasts confirm the previous assessment of the inflation outlook. Inflation is expected to pick up again in the second half of this year, partly because the annual rate of inflation will no longer take into account previous sharp falls in energy prices. In the second half of next year, inflation should decrease to the level we are aiming for. Domestic inflation remains high as wages continue to rise rapidly. On the other hand, labor cost pressures are easing and profits are partially dampening the inflationary effects of higher wages. Financing conditions remain tight and economic activity remains sluggish due to weak private consumption and investment. Growth is now projected to be slightly slower than in the June forecast, largely due to the expected weaker impact of domestic demand over the next few quarters.

Thus, based on the updated macroeconomic forecasts of the ECB's euro zone, compared to the previous ones in June, the forecasts for the growth of the gross domestic product for this year and next year have been reduced by 0.1 percent to 0.8 and 1.3 percent, respectively. Meanwhile, annual inflation has not changed and reaches 2.5 and 2.2 percent, respectively, and the unemployment forecast has also remained unchanged, i.e. it should reach 6.5 percent in both 2024 and 2025.

During the press conference, the head of the ECB announced that today's decision to lower interest rates was taken unanimously. Further decisions will no doubt continue to be driven by recent macroeconomic data and its trend.

"We thought that given that gradual process of disinflation, it was entirely appropriate to reduce the degree of monetary policy constraint," she said.

At the same time, Christine Lagarde pointed out that there will be only six weeks until the next meeting of ECB representatives on monetary policy issues, which is a very short period of time. She made it clear that it is unlikely that a decision to soften the monetary policy even more will be made during it, because it is simply too short a period for larger and fundamental changes to occur in the macroeconomic field.

The next meeting of ECB representatives on monetary policy issues is scheduled for October 17 and will be held in Ljubljana, Slovenia.

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