On Thursday 12 December, the Governing Council decided to again lower the three key interest rates of the European Central Bank (ECB) by 25 basis points for the fourth time since June (see EUROPE 13506/5).
From Wednesday 18 December, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 3.00%, 3.15% and 3.40% respectively.
Our mission to bring inflation back to 2% in the medium term has not been accomplished, but “we’re really on track” and this situation gave us a level of confidence to decide on a further rate cut of 0.25%, declared ECB President Christine Lagarde. She noted that the decision had been taken unanimously, even though proposals had been made for a reduction of 50 basis points.
Ms Lagarde justified this confidence by pointing out that, for the sixth time in a row, the monetary institute’s staff are projecting price rises of just 2.0% in 2025, even though prices in services remain high. Another relevant factor that led to Thursday’s decision was that corporate profits, wages and productivity are pointing in the same direction, without exerting upward pressure on inflation.
After reaching 2.3% in November, price inflation should have the following trajectory, according to the ECB: 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027. As for underlying inflation (excluding energy and food prices), the EU institution is projecting an average rise of 2.9% in 2024, 2.3% in 2025 and 1.9% in 2026 and 2027.
Asked about the possibility of another rate cut in January, potentially by 0.5%, the former head of the IMF reiterated the approach taken by the Governing Council: the rate path is not determined in advance and each decision is taken, meeting after meeting, on the basis of updated data. She also noted that, despite the easing observed, the ECB’s monetary policy remains “restrictive” from the point of view of financing conditions for the economy.
In addition, the services of the Frankfurt-based institute believes that growth in the euro area will remain modest over the medium term. They forecast GDP growth of 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027.
Ms Lagarde noted that there was a high level of uncertainty surrounding the development of the economy due to geopolitical risks and the climate crisis. The imposition of customs barriers by the United States following Donald Trump’s return to power would be “not good for growth at large”, she said.
TPI. The ECB President was also asked to comment on the political crisis in certain countries, such as France, which have not yet been able to draw up a budget for 2025, and in particular on the possible use of the unconventional ‘TPI’ (Transmission Protection Instrument) monetary policy instrument, set up in July 2022 to prevent a new sovereign debt crisis in the euro area (see EUROPE 12998/13).
“We did not discuss the TPI”, Ms Lagarde soberly replied to a journalist who asked why the markets were reacting so little to the political situation in France.
She also confirmed that, at the end of 2024, the ECB would stop reinvesting the proceeds from maturing securities acquired under the ‘PEPP’ programme set up to deal with the economic consequences of the Covid-19 pandemic. This withdrawal will reduce the portfolio of the ‘PEPP’ programme by €7.5 billion per month.
See the ECB’s monetary policy decisions: https://aeur.eu/f/es5 (Original version in French by Mathieu Bion)