ECB: Another interest rate cut – The prospect of inflationary pressures –

The governing board of the European Central Bank decided on the third consecutive reduction of interest rates by 25 basis points. It is the first time the ECB has cut interest rates in consecutive meetings since December 2011.

The interest rate of the deposit acceptance facility, through which it gives the direction of the monetary policy, is set at 3.25%.

The decision, which was not expected in previous weeks as minutes of the September meeting showed, comes after data showed the economy in the euro zone is in worse shape than when policymakers last met . At the same time, inflation in September fell below the ECB’s target and fell to 1.8%.

The decision, as the bank’s statement says, “is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.” Incoming inflation data suggest that the deflationary process is on track. The outlook for inflation is also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remain restrictive”

The ECB’s key interest rates

After the de-escalation of the cost of money by 25 basis points, the interest rates are set as follows: deposit acceptance facility, main refinancing operations and marginal financing facility will be reduced to 3.25%, 3.40% and 3.65% respectively. The de-escalation will take effect from 23 October 2024.

Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)

The APP portfolio is being reduced at a measured and predictable pace as the Eurosystem no longer reinvests principal payments from maturing securities, the central bank said in a statement.

“The Eurosystem no longer reinvests all principal payments from maturing securities purchased under the PEPP, reducing the PEPP portfolio by €7.5 billion per month on average. The Board intends to cease reinvestment under PEPP at the end of 2024.

“The Governing Council will continue to apply flexibility in the reinvestment of overdue redemptions in the PEPP portfolio in order to address the risks to the monetary policy transmission mechanism related to the pandemic.”

The outlook for inflationary pressures

According to the ECB, inflation in the coming months will move upwards and fall back to the target in 2025. “Domestic inflation remains high, as wages continue to grow at a high rate. At the same time, labor cost pressures are expected to continue to ease gradually, with earnings partially cushioning their impact on inflation.

The d.s. of the ECB reiterated the commitment to return inflation to 2% and did not commit to a predetermined monetary policy path. “The Board will continue to take a case-by-case and meeting-by-meeting approach to determining the appropriate level and duration of restraint. In particular, its interest rate decisions will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Board of Directors does not commit in advance to a specific course of interest rates.

Markets and economists now await President Christine Lagarde’s customary press conference for more details on the central bank’s next moves.

SOURCE: ot.gr