European Central Bank Reduces Interest Rates by 25 Basis Points

The Governing Council of the European Central Bank (ECB) today decided to reduce three key interest rates by 25 basis points. Accordingly, the interest rate on the cash deposit will be reduced to 2.75 percent, the interest rate for main refinancing operations will be reduced to 2.90 percent, and the interest rate for the overnight lending facility will be reduced to 3.15 percent. The reduction will take effect on February 5, 2025. The decision to reduce the interest rate on the cash deposit, which is the rate at which the Governing Council steers the monetary policy stance, is based on a new assessment of inflation prospects, the dynamics of core inflation, and the strength of monetary policy transmission.

As stated by the central bank, disinflation is progressing well. Inflation has continued to move largely in line with the projections of Eurosystem experts and should return to the Governing Council’s medium-term target of two percent over the year. Most measures of core inflation suggest that inflation will stabilize, and persistently, at levels around that target. Domestic inflation remains high, primarily because wages and prices in certain sectors are still adjusting to the previous significant increase in inflation with a considerable time lag. However, wage growth is decreasing in line with expectations, and profits partially neutralize its impact on inflation.

Borrowing for businesses and households is gradually becoming cheaper due to recent reductions in key interest rates. At the same time, financing conditions remain tightened, among other reasons because monetary policy remains restrictive and past interest rate increases are still being transmitted to existing loans as some loans are being renewed at higher interest rates upon maturity. The economy continues to be affected by adverse factors, but over time, growth in real incomes and the gradual weakening of the impact of restrictive monetary policy should contribute to increased demand.

– The Governing Council is firmly committed to stabilizing inflation, and persistently, at a medium-term target level of two percent. In determining the appropriate monetary policy stance, a data-driven approach will be applied at each meeting. Namely, the Governing Council’s decisions on interest rates will depend on its assessment of inflation prospects based on new economic and financial data, the dynamics of core inflation, and the strength of monetary policy transmission. The Governing Council does not pre-commit to a specific rate change dynamic – stated the central bank.