ECB Cuts Rates Once More: Navigating Future Implications

2024-09-12 15:04:00

The European Central Bank resumed its policy of easing credit in small steps on Thursday, making a second rate cut in three months but without giving any indication of its strategy for the future. The deposit rate, which is a benchmark because banks still have abundant liquidity provided by the ECB during the crisis years, was cut by 25 basis points to 3.50% as expected.

The decline in inflation, to 2.2% in August in the eurozone, argued in favour of a new easing, after that of June, as did the sluggishness of economic activity in Europe. “It is now appropriate to take a new step in reducing the restrictive nature of monetary policy”, the guardians of the euro considered in their decision.

No reason to accelerate the pace of rate cuts

The timing of further rate cuts remains uncertain: as expected, the Governing Council did not provide guidance on the pace of monetary easing. “With wage growth well outpacing productivity growth and services inflation picking up, there is no reason for the Governing Council to accelerate the pace of rate cuts or commit to further rate cuts at this stage,” said Sylvain Broyer, Chief Economist at S&P Global Ratings.

By lowering its reference rate, the ECB will influence the conditions under which banks lend to each other and, consequently, borrowing conditions, offering a small breath of fresh air to ease tensions on mortgage credit and loans to businesses.

After a phase of unprecedented credit increases to combat exceptionally high inflation, particularly following the Russian war in Ukraine, the guardians of the euro lowered rates in June for the first time in five years. They then outpaced the US Federal Reserve. The latter is expected to decide on its first rate cut on September 18, after raising the cost of money to levels not seen since 2001.

Slowdown in wage increases

The ECB had paused in July, but the economic context has pushed it back into action: inflation has fallen below the 2% target in the two largest economies, France and Germany, while wage increases are starting to slow. Moreover, economic growth in the eurozone has been revised slightly downwards, to 0.2% for the second quarter of 2024.

Governments must act ‘now’ to reduce budget deficits, says Lagarde

European Central Bank President Christine Lagarde on Thursday urged eurozone governments to start reforms “now” to reduce their budget deficits. Implementing EU rules “completely, transparently and without delay will help governments reduce budget deficits and debt ratios,” Lagarde said. “Governments should now commit firmly to their medium-term plans for fiscal and structural policies.”

The debate pits “those who are beginning to worry about a pronounced slowdown in demand”, justifying a rapid relaxation of the cost of credit, against “those who consider that the rise in purchasing power, permitted by disinflation, will support consumption and that there is therefore no urgency to act strongly”, he explains.

Avoiding rate volatility in the interbank market

The new economic projections published by the ECB on Thursday do not give a clear indication: slight downward adjustment of growth, maintenance of inflation expectations for 2024 to 2026. Isabel Schnabel, member of the ECB’s executive board, recently called for a cautious and gradual approach on rates to avoid a return of inflation.

Technical detail of today’s decisions: the spread between the deposit rate and the one-week bank refinancing rate was reduced from 50 to 15 basis points. The aim of this change, announced in March, is to avoid rate volatility on the interbank market when the ECB has reduced excess liquidity in the banking sector, a process that is expected to take years but which the institute wants to anticipate.

The rate on refinancing operations (MRO), which banks pay if they have to borrow money from the ECB for a week, has thus fallen to 3.65%, and that on overnight allocations (MLF) to 3.90%.

Draghi report on EU economy ‘harsh but fair’, says Lagarde

The diagnosis of the European economy in Mario Draghi’s report is “harsh but fair”, ECB President Christine Lagarde said on Thursday, calling on governments to take up the proposals made in the document. “This is a great report in that it makes a harsh but fair diagnosis in our eyes and it also indicates structural reforms (…) that could be extremely useful for making Europe stronger”, Christine Lagarde told the press.

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**Related Questions for:‌ ECB⁢ Cuts ‍Interest Rates as ‍Growth Dwindles**

ECB ⁤Cuts ​Interest Rates as ‍Growth Dwindles

The European Central Bank​ (ECB) has taken ⁤another step in ​easing credit by cutting its deposit rate by 25 basis points to 3.50% [[1]]. This decision marks the second ​rate cut in three months, following a similar ​move in⁣ June. The ECB’s Governing Council has chosen to reduce the restrictive nature ‌of monetary policy, citing‌ declining‍ inflation⁢ and sluggish ‌economic activity in ⁢Europe.

The decline in inflation,​ which has fallen to 2.2% in August in the eurozone, has created an environment conducive to easing credit. Additionally, economic​ growth ‌in the eurozone has been ​revised downward to 0.2% for the second ⁤quarter of 2024 [[3]]. ​The ECB’s decision is expected to influence borrowing conditions, offering a small respite⁤ to mortgage⁢ credit and loans to‌ businesses.

No Reason to Accelerate the Pace⁣ of Rate Cuts

The timing of further rate cuts remains uncertain, as the Governing Council did not provide guidance on the⁤ pace of monetary easing. According to Sylvain Broyer, Chief Economist at S&P Global Ratings, there is no reason‍ to accelerate ​the ​pace‍ of ‍rate ​cuts or commit to further rate cuts at this stage, given that wage growth is well outpacing productivity growth and services inflation is picking up [[1]].

Slowdown⁢ in Wage Increases

The ECB had paused in July,⁤ but the economic context has pushed it back into action. Inflation has fallen below the ⁤2% target in the two largest economies, France and Germany, while wage increases are⁣ starting‍ to slow. ​The ‍ECB’s decision is‍ seen‌ as a cautious approach⁣ to avoid a return of⁣ inflation.

Avoiding Rate Volatility in the Interbank Market

The ECB has also reduced the spread between the deposit rate‌ and the one-week bank refinancing rate from 50‌ to 15⁤ basis points, as announced in March [[2]]. This change aims to avoid rate volatility on the interbank market when the ECB reduces excess liquidity in the banking sector, a process expected to take years.

The rate on refinancing operations ⁤(MRO), which banks pay if they have to borrow money from the ECB for a week, has fallen to 3.65% [[3]]. The‌ ECB’s decision is ​seen as a cautious and gradual approach to monetary ⁤easing, aiming‍ to support⁤ economic growth while avoiding a return of inflation.

the ECB’s‍ decision to cut ‍interest rates is seen as a measured response ⁣to declining inflation and sluggish economic growth in⁣ Europe. While the timing of ⁢further rate cuts remains uncertain, the⁤ ECB’s cautious ⁢approach​ is expected to support economic growth and borrowing conditions in the eurozone.

References:

[1]

<a href="https://www.ecb.europa.eu/stats/policyandexchangerates/keyecbinterestrates/html/index.en.html”>[2]

[3]

Here are PAA-related questions for the title **”ECB Cuts Interest Rates: What Does It Mean for the Eurozone Economy?”**

ECB Cuts Interest Rates: What Does It Mean for the Eurozone Economy?

On September 12, 2024, the European Central Bank (ECB) made a surprise move by cutting its key interest rates for the second time in three months. This decision was taken in response to the slowing down of economic growth and inflation in the eurozone. The deposit rate, which is a benchmark for banks, was lowered by 25 basis points to 3.50% [[3]].

Why Did the ECB Cut Interest Rates?

The ECB’s decision to cut interest rates was driven by several factors, including:

Decline in Inflation: Inflation in the eurozone has fallen to 2.2% in August, which is below the ECB’s target of 2%. This decline in inflation has given the ECB room to ease monetary policy [[2]].

Slow Economic Growth: Economic growth in the eurozone has been revised downwards to 0.2% for the second quarter of 2024, indicating a slowdown in economic activity [[1]].

Slowing Wage Increases: Wage increases are starting to slow down, which could impact consumption and economic growth in the future [[1]].

What Does This Mean for the Eurozone Economy?

The ECB’s decision to cut interest rates is aimed at stimulating economic growth and inflation in the eurozone. By lowering its reference rate, the ECB will influence the conditions under which banks lend to each other and, consequently, borrowing conditions. This could:

Ease Tensions on Mortgage Credit and Loans: A lower interest rate could make borrowing cheaper for households and businesses, which could help to ease tensions on mortgage credit and loans to businesses [[1]].

Support Consumption: The rise in purchasing power, permitted by disinflation, could support consumption and economic growth [[1]].

What’s Next for the ECB?

The timing of further rate cuts remains uncertain, as the ECB did not provide guidance on the pace of monetary easing. However, the ECB’s President, Christine Lagarde, has urged eurozone governments to start reforms “now” to reduce their budget deficits, which could help to support economic growth and stability in the region [[1]].

Conclusion

The ECB’s decision to cut interest rates is a step in the right direction to stimulate economic growth and inflation in the eurozone. While the timing of further rate cuts is uncertain, the ECB’s move is expected to ease tensions on mortgage credit and loans to businesses, and support consumption and economic growth in the region.

References

[1] European Central Bank. (n.d.). Key ECB interest rates. Retrieved from

[2] Trading Economics. (n.d.). Euro Area Interest Rate. Retrieved from

[3] CNBC. (2024). European Central Bank cuts interest rates again and…. Retrieved from

Related Questions

How will the ECB’s decision to cut interest rates impact the eurozone economy?

What are the implications of the ECB’s decision on borrowing costs for households and businesses?

How will the ECB’s decision to cut interest rates affect the value of the euro?

These are just some of the related questions that can be explored further in response to the ECB’s decision to cut interest rates.