ECB cuts key interest rates amid easing inflation pressure

The European Central Bank (ECB) has reduced its key interest rates by 25 basis points, citing improvements in inflation dynamics and continued restrictive financing conditions. The decision, announced on 17th October 2024, will see the deposit facility rate, main refinancing operations rate, and marginal lending facility rate fall to 3.25%, 3.40%, and 3.65% respectively, effective 23rd October.

This move marks a significant shift in the ECB’s monetary policy, reflecting an updated assessment of the inflation outlook. The ECB noted that the disinflationary process is progressing as expected, with incoming data indicating weaker-than-anticipated economic activity. Despite this, inflation is projected to rise temporarily in the coming months before gradually easing towards the ECB’s 2% medium-term target next year.

While inflation remains elevated domestically, driven in part by rising wages, the ECB anticipates that labour cost pressures will continue to ease gradually. Profits are expected to absorb some of these inflationary impacts.

The Governing Council has reiterated its commitment to ensuring inflation returns to its 2% target, stressing the need to maintain restrictive policy rates for as long as necessary. The ECB will adopt a meeting-by-meeting approach, remaining data-dependent when deciding future rate changes.

In addition to adjusting interest rates, the ECB provided updates on its asset purchase programme (APP) and pandemic emergency purchase programme (PEPP). The APP portfolio is declining steadily as reinvestments from maturing securities cease, while the PEPP portfolio is being reduced by €7.5 billion monthly. The ECB intends to end all PEPP reinvestments by the close of 2024 but will retain flexibility to mitigate risks to monetary policy transmission stemming from the pandemic.

As European banks repay the amounts borrowed under targeted longer-term refinancing operations, the ECB plans to continually evaluate how this impacts its broader monetary policy stance.

ECB President Christine Lagarde will provide further insights on the decisions at a press conference later on Thursday (today).