ECB Cuts Rates By 25 Bps As Expected On Improving Inflation Outlook

(RTTNews) - The European Central Bank lowered interest rates by a quarter basis point on Thursday, in line with expectations, citing an improvement in the inflation outlook.

The Governing Council, led by ECB President Christine Lagarde, cut the main refinancing rate by 25 basis points to 4.25 percent. The deposit facility rate was lowered from a record high to 3.75 percent and the marginal lending rate was reduced to 4.50 percent. "Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady," the ECB said.

The central bank, however, acknowledged that domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. Consequently, the ECB staff raised the headline and core inflation projections for this year and next.

The ECB staff now sees headline inflation at 2.5 percent this year, 2.2 percent next year and at 1.9 percent in 2026.

Core inflation that excludes energy and food is projected at 2.8 percent this year, 2.2 percent next year and 2.0 percent in 2026.

The bank also projected Eurozone economic growth at 0.9 percent this year, 1.4 percent next year and 1.6 percent in 2026.

"The Governing Council is determined to ensure that inflation returns to its 2 percent medium-term target in a timely manner," the bank said.

"It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim."

Policymakers will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, the central bank said.

"The Governing Council is not pre-committing to a particular rate path," the ECB added.

ECB policymakers, including Lagarde, had signaled a June rate cut for months. The latest rate cut marks a rare occasion when the ECB has lowered rates ahead of the U.S. Federal Reserve, which is expected to follow suit in September. The Bank of Canada reduced its interest rate by 25 basis points on Wednesday, the first rate cut in four years, to become the first G7 country to ease policy in the current cycle that saw central banks adopting aggressive tightening to rein in the runaway inflation in the post-pandemic era.

Recent economic data pointed to sticky inflation in the euro area, mainly in the services sector. Wage growth also remains a concern for policymakers. Economists are of the view that there is little scope for further easing this year.

"We think that sticky inflation will limit the room for additonal rate cuts and the ECB's statement also doesn't give away any hints at the future path of the ECB," ING economist Carsten Brzeski said.

"Any celebrations about today's 25bp rate cut by the ECB are likely to be muted at best, given that the decision was fully discounted by financial markets and the most recent inflation and wage data have dampened expectations for a rapid easing cycle," Capital Economics economsit Andrew Kenningham said.

"Moreover, the Bank's forecasts and statements are slightly hawkish."

The central bank also confirmed that it will reduce the asset holdings under the pandemic emergency purchase program (PEPP) by EUR 7.5 billion per month on average over the second half of the year. Reinvestments under the PEPP are planned to be discontinued at the end of 2024.