At its monetary policy meeting in Frankfurt on Thursday 6 June, the Governing Council of the European Central Bank (ECB) decided to cut its three key rates by 25 basis points for the first time since 2019. This comes after a series of 10 consecutive hikes in response to strong inflationary pressures, particularly in the euro area, followed by a period of pause, during which the ECB’s key rates were maintained at this high level.
From 12 June, the interest rate on the main refinancing operations will be 4.25%, the rate on the marginal lending facility 4.50% and the rate on the deposit facility 3.75%.
The decision was taken by mutual agreement between the members of the Governing Council, with the exception of one member, said ECB President Christine Lagarde, adding that the decision to cut rates had been taken as confidence in the direction to take had grown in recent months.
“We are currently ‘restrictive’, as our chief economist, Philip Lane, has indicated. What we are doing here is removing a degree of restriction”, said Ms Lagarde.
In addition, the Governing Council has decided that the Eurosystem’s holdings of securities under the ‘PEPP’ asset purchase programme initiated during the Covid-19 pandemic will be reduced by an average of €7.5 billion per month in the second half of 2024. The ECB has specified that the terms of this reduction will be broadly in line with those followed under the asset purchase programme (APP).
Persistent inflationary pressures
Eurosystem’s inflation projections for the euro area have been revised upwards, for both headline and core inflation.
The ECB indicated that domestic inflation is persisting in the euro area, mainly due to wage increases.
According to revised projections by Eurosystem staff, headline HICP inflation should average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. It would therefore remain above the 2% target for most of 2025.
In their estimate for core inflation (price rises excluding energy and food), Eurosystem staff are now forecasting an average rise of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026.
In terms of economic growth, they forecast a rebound, with real gross domestic product (GDP) rising by 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.
Data-driven decisions
The drop of 25 basis points was expected by observers (see EUROPE 13415/18, 13389/4).
However, one of the challenges of the day, also within the Governing Council, was to find indications of the ECB’s next decisions in favour of a pause or further rate cuts, in the absence of any forward guidance for its monetary policy.
Christine Lagarde firmly reiterated that the Governing Council was not committing to any particular rate path in advance and was sticking to its now established approach of taking decisions “meeting by meeting” on the basis of updated data, analysed through the lens of the three criteria guiding its reaction function (see EUROPE 13280/8).
The former head of the IMF acknowledged that the publication of data might not be synchronised with decisions, but stressed that Eurosystem was collecting as much data as possible.
For example, data on salaries, which are crucial because of their impact on inflation - in this case, compensation data per employee for the first quarter of 2024 - will not be received until 7 June.
Eurosystem has also refined its wage trackers to help with projections. “What the wage tracker tells us is that for the stock of agreement and various accords that are recorded by the wage tracker, this is still elevated. That’s the stock. When we look at the flow, what is coming in now, we are seeing a decline in wage growth”, said Ms Lagarde.
The ECB President also underlined her confidence in the robustness of the macroeconomic projections and stressed the importance of the way in which the Eurosystem staff collected and analysed the data.
“So we know the destination, we know the direction that we are taking, we know the methodology that we will apply. What is very uncertain is the speed at which we travel and the time that it will take”, added Christine Lagarde, saying that this depended on the data and that there could also be obstacles, both foreseeable and not, in the way.
Link to the monetary policy decisions: https://aeur.eu/f/ck9
Link to the macroeconomic projections: https://aeur.eu/f/ckc (Original version in French by Émilie Vanderhulst)