The European Central Bank (ECB) has decided to cut interest rates for the first time in almost five years, reversing course after the spiral of increases that brought reference rates to a record level, between 4 and 4.75%. With the cut of a quarter of a percentage point, the deposit rate now falls to 3.75%, the main refinancing rate to 4.25%, and the marginal lending rate to 4.5%. The reduction in rates was widely expected, after inflation in the Eurozone seems to have returned under control for some months now, a key objective of the aggressive rate hikes of the last four years (the ECB’s primary mandate is to maintain the rate inflation close to 2%). «Based on an updated assessment of the inflation outlook, underlying inflation dynamics and the intensity of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy tightening after nine months of unchanged interest rates», writes the ECB in announcing the decision. Since this morning the main European stock markets have opened in positive territory, but operators are scanning the horizon to understand above all whether today’s cut will remain an “isolated” cut or will only be the first of a new series. However, the Governing Council does not intend to go too far on this issue. However, for the next decisions on rates, it states, the ECB «will base itself on its assessment of the inflation outlook, considering the new economic and financial data, the dynamics of underlying inflation and the intensity of the transmission of monetary policy, without being tied to a particular rate path”.
The ECB forecasts and the monetary policy dilemma
Scenario for the next few months remains uncertain. According to the projections released today by the ECB itself, in fact, on the one hand the Eurozone is expected to grow more than expected – by 0.9% instead of 0.6% in 2024, then by 1.4% in 2025 and by 1. 6% in 2024. On the other hand, however, it could be inflation that raises its head again compared to previous forecasts: in the euro area it is now estimated at 2.5% in 2024 (from the 2.3% indicated in March ) and to 2.2% in 2025 (from the 2% indicated in April). Values that remain above the threshold “tolerated” by the ECB: an indication that the path to further cuts in the coming months will be anything but obvious.
The path according to Lagarde
«Since our meeting in September 2023 (the last in which Frankfurt raised rates, ed) inflation has fallen by more than 2.5 percentage points and the prospects have improved a lot”, ECB governor Christine Lagarde reconstructed in a press conference. Underlying inflation has also fallen, considerably reducing the pressure on prices: thanks to the firm line of monetary policy maintained by the Eurotower in recent months, claims Lagarde. «At the same time, however, despite the progress made, internal pressures on prices remain strong given the high growth in wages and inflation prospects remain above our target, even for a good part of 2025». On the basis of the ECB’s scenarios mentioned, therefore, Lagarde reaffirms her “determination to promptly bring inflation back within the target value of 2% in the medium term”. For this reason, the governor indicates, “we will keep rates at a sufficiently restrictive level for as long as it is necessary to achieve the objective”.
