The European Central Bank (ECB) has made a bold move in its monetary policy. It has cut interest rates for the first time since 2019. The ECB lowered the benchmark rate by 25 basis points to 4.25% per annum. The marginal lending rate is now 4.5%, and the deposit rate is 3.75%. Previously, the ECB had kept rates unchanged for five consecutive meetings.
The ECB stated that easing monetary policy was appropriate, based on updated inflation data. This decision was taken after nine months of holding rates steady. In September 2023, the ECB Governing Council announced that inflation had decreased by more than 2.5 percentage points and that the inflation forecast had significantly improved. However, despite recent progress, internal price pressure remains strong due to rising wages. The ECB supposes that inflation will stay above the 2% target next year.
Despite current challenges, the ECB Governing Council is committed to ensuring that inflation returns to the 2% medium-term target. In this context, the regulator will keep key rates at restrictive levels for as long as necessary. "In particular, interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission," the ECB document reads.
Recently, the ECB released a new macroeconomic forecast. According to this report, inflation in the eurozone will increase to 2.5% from 2.3% (March outlook) in 2024. The 2025 inflation forecast has been raised to 2.2% from the previous 2%. Additionally, the GDP growth outlook for 2024 has been updated to 0.9% from 0.6%. Consumer prices, excluding energy and food, are expected to rise by 2.8% in 2024, 2.2% in 2025, and 2% in 2026. Earlier, the ECB had projected increases of 2.6%, 2.1%, and 2%, respectively.
The central bank also plans to reduce its asset portfolio by €7.5 billion per month, acquired under the Pandemic emergency purchase programme (PEPP). Furthermore, by the end of 2024, the ECB will end reinvestments from PEPP proceeds. It is ready to adjust other financial instruments to bring inflation back to the 2% target.