The European Central Bank is expected to resume interest rate cuts on Thursday, driven by falling inflation and a fragile euro zone economy, with attention focused on the pace of monetary easing in the coming months.
Several members of the Governing Council, which is holding its back-to-school meeting, have made no secret of their preference, like the governor of the Bank of France: a new rate cut in September would be “fair and wise”, François Villeroy de Galhau recently declared.
The deposit rate, which is a benchmark because banks still have ample liquidity provided by the ECB during the crisis years, is expected to be cut by 25 basis points to 3.50%.
These decisions influence the interbank market rate and, consequently, the borrowing conditions of households and businesses.
After a phase of unprecedented credit increases to combat exceptionally high inflation, particularly following the Russian war in Ukraine, the guardians of the euro cut rates in June for the first time in five years.
They had then overtaken the American Federal Reserve, which should decide on its first rate cut on September 18, after having raised the cost of money to levels not seen since 2001.
– Assess the risks –
The ECB had observed a pause in July, but the economic context is pushing it back into action: inflation slowed to 2.2% over a year in August in the euro zone and fell below the 2% target in the two main economies, France and Germany, while wage increases are starting to slow.
In addition, economic growth in the euro area has been revised slightly downwards, to 0.2% for the second quarter of 2024.
While this new step on rates is hardly in doubt, “the way in which the ECB will communicate on the continuation of its action remains very uncertain, with a risk that it will disappoint by being too reserved”, according to analysts at RichesFlores Research.
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Everything will depend on which side the “balance of risks” tips, a subject “not yet consensual” among central bankers in the euro zone, Gilles Moec, chief economist at Axa, told AFP.
The debate pits “those who are beginning to worry about a pronounced slowdown in demand”, justifying a rapid relaxation of the cost of credit, against “those who consider that the rise in purchasing power, permitted by disinflation, will support consumption and that there is therefore no urgency to act strongly”, he explains.
The new economic projections published by the ECB on Thursday are unlikely to help: observers expect only a slight downward adjustment in growth and inflation for 2024 and 2025.
– Message for Paris –
ECB Executive Board member Isabel Schnabel recently called for a cautious and gradual approach to rates to avoid a return of inflation.
A warning that should encourage Christine Lagarde to maintain the principle of relying on data to act meeting after meeting, without long-term commitment.
The ECB will also stress the importance of swift implementation of new EU budget rules to ensure price stability, a message indirectly aimed at new French Prime Minister Michel Barnier, as France’s public deficit forecasts, already out of line with the EU Treaty, risk further deterioration.
Technical details of today’s decisions: the gap between the deposit rate and the refinancing rate of banks will be reduced from 50 to 15 basis points.
The aim of the change, announced in March, is to avoid volatility in rates on the interbank market when the ECB has reduced excess liquidity in the banking sector, a process that is expected to take years but which the institute wants to anticipate.
The rate on refinancing operations (MRO), which banks pay if they have to borrow money from the ECB for a week, should thus fall to 3.65%, and that on overnight allocations (MLF) to 3.90%.
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