“It is now appropriate to take a further step in reducing the restrictive nature of monetary policy,” the decision statement said.
The European Central Bank resumed its policy of easing credit in small steps on Thursday, making a second rate cut in three months but without giving any indication of its strategy for the future. The deposit rate, which is a benchmark because banks still have abundant liquidity provided by the ECB during the crisis years, was cut by 25 basis points to 3.50% as expected.
The decline in inflation, to 2.2% in August in the eurozone, argued in favour of a new easing, after that of June, as did the sluggishness of economic activity in Europe. “It is now timely to take a further step in reducing the restrictive nature of monetary policy”the Euro guardians said in their decision.
The timing of further rate cuts remains uncertain: as expected, the Governing Council did not provide any guidance on the pace of monetary easing. “With wage growth well outpacing productivity growth and services inflation picking up, there is no reason for the Governing Council to accelerate the pace of rate cuts or commit to further rate cuts at this stage.”comments Sylvain Broyer, chief economist at S&P Global Ratings.
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Inflation slowed in France and Germany
By lowering its reference rate, the ECB will influence the conditions under which banks lend to each other and, consequently, borrowing conditions, offering a breath of fresh air to ease tensions on mortgage credit and loans to 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 had lowered rates in June for the first time in five years. They had then outpaced the American Federal Reserve. The latter should decide on its first rate cut on September 18, after having raised the cost of money to levels not seen since 2001.
The ECB had paused in July, but the economic context has pushed it back into action: inflation has fallen below the 2% target in the two largest economies, France and Germany, while wage increases are starting to slow. Moreover, economic growth in the eurozone has been revised slightly downwards, to 0.2% for the second quarter of 2024.
Assess the risks
The ECB president’s statements to the press on Thursday afternoon will be scrutinized to see which way the vote is leaning. “balance of risks”a subject “not yet consensual” between central bankers in the eurozone, Gilles Moec, chief economist at Axa, told AFP. The debate pits “those who are beginning to worry about a pronounced slowdown in demand”justifying the rapid easing of the cost of credit, and “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 Thursday by the ECB do not give a clear indication: slight downward adjustment of growth, maintenance of inflation expectations for 2024 to 2026. Isabel Schnabel, member of the ECB’s executive board, recently called for a cautious and gradual approach on rates to avoid a return of inflation.
Technical details of today’s decisions: the spread between the deposit rate and the one-week bank refinancing rate was reduced from 50 to 15 basis points. The aim of this 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, has thus fallen to 3.65%, and that on overnight allocations (MLF) to 3.90%.
