After June (see EUROPE 13425/1) and September (see EUROPE 13481/2), the ECB’s Governing Council took the unanimous decision on Thursday 17 October in Ljubljana to cut its three key rates by 25 basis points, as the Frankfurt-based monetary institution said it was surprised by the weakness of certain economic indicators.
From Wednesday 23 October, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be cut to 3.25%, 3.40% and 3.65% respectively.
Speaking to the press, ECB President Christine Lagarde welcomed the fact that, based on the information available, “the disinflationary process (is) well on track”. “Are we breaking the neck of inflation? Not yet. Are we in the process of doing so? Yes”, she said, pointing out that food prices were still high.
Average price inflation in the euro area fell from 2.2% in August to 1.7% in September, returning to its lowest level since April 2021.
Weaker than expected economic activity explains this fall in inflation, which surprised the ECB and observers. In particular, it is due to lower-than-expected consumption, with the household savings rate in the second quarter at a much higher level than before the Covid-19 pandemic.
According to the ECB, downside risks continue to dominate the macroeconomic situation, particularly the geopolitical risks influencing energy prices. Asked about the potential impact of the US elections, the ECB President noted that the European economy would suffer from trade barriers in the event of trade tensions with the future US administration.
“But we’re not looking at a recession” in the euro area, Ms Lagarde said, speaking instead of a “soft landing” for the economy.
Faced with weaker-than-expected indicators, is the ECB running the risk of not easing its monetary policy enough by cutting rates by just 0.25%? Our economists’ proposal was “the most appropriate”, replied the former head of the IMF.
In December, the ECB will have updated economic projections at its disposal. On this basis, it will review its monetary policy. In the meantime, Ms Lagarde reiterated that the Governing Council never makes commitments in advance, with each monetary decision being taken on the basis of up-to-date data and meeting by meeting. The ECB is also ready to adjust its monetary policy instruments at any time to ensure that inflation reflects its primary task of maintaining price stability at 2% over the medium term.
Ms Lagarde also urged EU leaders to ensure a “concrete and ambitious” follow-up to the ‘Draghi’ report on European competitiveness (see EUROPE 13478/1) and the ‘Letta’ report on the internal market (see EUROPE 13393/3), and to put in place the revised European economic governance framework “without delay and in its entirety”. The right balance needs to be struck between fiscal consolidation and continued reform and investment, she stressed.
See the ECB’s monetary decisions: https://aeur.eu/f/dxl (Original version in French by Mathieu Bion)