On Thursday 12 September in Frankfurt, the ECB’s Governing Council unanimously decided to follow up its June decision (see EUROPE 13425/1) with a further 25 basis point cut in the interest rate on the deposit facility, deeming the available economic data convincing enough to ease monetary policy.
From Wednesday 18 September, the deposit facility rate will therefore fall from 3.75% to 3.5%. In line with decisions taken in March, the spread between this rate and the rate on the main refinancing operations will not exceed 15 basis points, so that the latter will be reduced from 4.25% to 3.65%. In addition, as the spread between the rate on the main refinancing operations and that on the marginal lending facility may not exceed 25 basis points, the latter will be reduced from 4.50% to 3.90%.
ECB President Christine Lagarde justified her decision on the basis of three criteria. Firstly, the latest available data confirms that “we’re heading towards our target [2% inflation, Editor’s note] in a timely manner before the end of 2025”, she indicated. On Thursday, the ECB unveiled new forecasts for average price rises in the euro area, along the following trajectory: 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. However, a slight upturn is expected between now and the end of 2024.
Nevertheless, the situation regarding underlying inflation (excluding food and energy prices) is still “not satisfactory”, as it has been revised slightly upwards for 2024 (2.9%) and 2025 (2.3%), admitted Mrs Lagarde, recommending that we keep a close eye on this figure. She pointed out that prices in the services sector, one of the components of this underlying inflation, had recently risen, due to wage increases which should fade during 2025.
Thirdly, the impact of monetary policy is visible in the economy, albeit with a time lag. With rising interest rates, “we observe that financing conditions continue to be restrictive”, noted Mrs Lagarde.
Asked about future monetary decisions by the ECB, whose Governing Council will next meet in five weeks’ time in Ljubljana, the President reiterated the usual message that the Governing Council is not pre-committing to a particular inflation reduction path and that it will continue to follow a data-dependent and meeting-by-meeting approach.
Growth. On Thursday, the former head of the IMF indicated that the downside risks to growth, particularly geopolitical risks, were still predominant. Wealth generation, estimated at 0.2% of GDP in the second quarter, was driven by exports and public spending, with consumption lagging behind. While services are doing well, industry and construction are struggling.
In the end, the ECB revised its growth forecasts for the euro area slightly downwards, along the following trajectory: 0.8% of GDP in 2024, 1.3% in 2025 and 1.5% in 2026. Nevertheless, “we expect the recovery to strengthen over time”, said Mrs Lagarde.
Drawing on the recommendations of the Draghi report on European competitiveness (see EUROPE 13478/1) and the Letta report on the internal market (see EUROPE 13393/3), she stressed the urgent need for Member States to carry out “reforms” to stimulate their economies. She also called on them to apply the revised Stability Pact “without delay” in order to consolidate their public finances.
See monetary policy decisions: https://aeur.eu/f/df4 (Original version in French by Mathieu Bion)