ECB Cuts Interest Rates for the First Time Since 2019

The Governing Council of the European Central Bank (ECB) today decided to cut three key interest rates by 25 basis points, reported the Croatian National Bank.

Accordingly, the interest rate for the main refinancing operations will be reduced to 4.25 percent, the interest rate for the overnight lending facility to 4.5 percent, and the deposit facility rate to 3.75 percent. The reduction will take effect on June 12, 2024.

Based on the new assessment of inflation prospects, the dynamics of core inflation, and the strength of the transmission of monetary policy at this time, after a nine-month period during which the ECB did not change interest rates, it is appropriate to ease the restrictiveness of monetary policy, the ECB explains.

Namely, since the Governing Council meeting in September 2023, inflation has decreased by more than 2.5 percentage points, and inflation prospects have significantly improved. Core inflation has also decreased, further indicating a conclusion about weakening price pressures, and inflation expectations have decreased for all periods. Financing conditions have remained restrictive due to monetary policy, contributing to reduced demand and maintaining a firm anchoring of inflation expectations, thus making a significant contribution to reducing inflation.

At the same time, despite the progress made in recent quarters, price pressures in the eurozone remain strong in the context of increased wage growth, and inflation is likely to remain above target levels for a large part of next year. The latest projections from Eurosystem experts for overall and core inflation have been revised upward for 2024 and 2025 compared to the projections from March. Experts now predict that overall inflation in the eurozone will average 2.5 percent in 2024, 2.2 percent in 2025, and 1.9 percent in 2026.

Regarding inflation excluding energy and food (core inflation), experts predict an average rate of 2.8 percent in 2024, 2.2 percent in 2025, and 2 percent in 2026. Economic growth in the eurozone is expected to increase to 0.9 percent in 2024, 1.4 percent in 2025, and 1.6 percent in 2026.

The ECB concluded that key interest rates will remain ‘sufficiently restrictive for as long as necessary to achieve’ the inflation target of 2 percent.

In determining the appropriate level of restrictiveness and the duration of restrictive monetary policy, the ECB will, as before, base its interest rate decisions on inflation data.