The European Central Bank (ECB) stuck to the script and decided to cut its official interest rates by 0.25 points on Thursday. This is the second quarter-point cut in this cycle of monetary austerity. The first “relief” came in June, even though financing conditions (the cost of mortgages and other loans) remain “restrictive,” as the ECB itself describes them. In July, the institution’s board decided to wait, despite the moderation in inflation. Price increases moderated to 2.2% in the eurozone as a whole in August, at an annual rate. And to 2.3% in Spain, close to the ECB’s theoretical target.
In addition, the institution’s economists have updated their forecasts and project an average general inflation of 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, unchanged from June. Regarding economic growth, the ECB expects GDP growth of 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. The organization admits a “slight downward revision” due to “a weaker contribution from domestic demand in the coming quarters.”
“With inflation already under control in the eurozone, the key now is to avoid recession in Germany and France,” Nacho Álvarez, a professor at the UCM and former Secretary of State for Social Rights, in the first coalition government, summed up on Thursday. The ECB’s aggressive strategy to harm the economy to combat rising prices has assumed this risk and the destruction of jobs, which Spain, for the moment, is exceptionally saving for various reasons.
This Thursday’s monetary policy meeting took place in special circumstances. At an anecdotal and national level, it was the debut of the new governor of the Bank of Spain, José Luis Escriva, who took his place alongside the rest of the governors of the central banks of each eurozone partner and the members of the executive committee of the ECB, chaired by Christine Lagarde and of which Luis de Guindos is vice-president. At a technical level, the institution has changed the way of considering the “price” of money. The reference is no longer the interest rate of the main financing operations between banks but the interest rate of the deposit facility.
In simpler terms, the reference is no longer the interest rate at which banks obtain liquidity. Why? Because they have abundant liquidity, after the expansionary policies that the ECB has implemented in recent years to help the exit from the financial crisis, first, and from the pandemic, then. The reference then becomes the interest rate at which the Eurosystem remunerates – with public money, moreover – the liquidity that remains with the banks and that they deposit in the central banks of their countries.
In summary, the reference interest rates, those of the deposit facility, remain at 3.5%. Another technical change is that the “corridor” or difference between this deposit facility and the interest rate on the main financing operations was until now half a point. This “corridor” or difference is reduced to 0.15 points. The result is that the interest rate on the main financing operations was reduced by 0.6 points this Thursday, to 3.65% compared to 4.25% where it was maintained in July.
All these changes were announced in March. As well as other monetary policy tools that seek to guarantee the liquidity of the banking sector and that continue to benefit it directly. For example, the ECB has decided to maintain the required reserve ratio for banks at a ratio of 1% (here is the technical explanation). Likewise, the remuneration of these required reserves that the entities must keep in the Eurosystem – the Bank of Spain in our case, and the rest of the central banks of each country in the eurozone: the Bundesbank, Banca d’Italia or Banque de France – remains “unchanged at 0%”, the institution underlines in its press release. In this way, the rest of the money that the banks “park” in the central banks will continue to be remunerated according to the interest rate of the deposit facility (which is currently 3.5%), with public money.
Sumar’s proposals in Spain or by various European lobby groups to increase the percentage of money exempt from remuneration of the total that banks park in central banks have fallen on deaf ears. “Eurozone banks are making risk-free windfall profits exceeding €140 billion in 2023 simply by depositing funds in the Eurosystem,” begins an open letter published in March by Positive Money EU, a non-profit organization that fights for a fairer world and a fair monetary and banking system.
These “extraordinary” profits were close to 10 billion for Spanish entities in 2023. In reality, according to Sumar, it is a public transfer. In addition, they represent a good part of their record profits: 26 billion in the case of the big banks, which have also benefited from the expansion of their margins thanks to the rate increases and their transfer to the Euribor of mortgages and to the cost of loans in general.
