The European Central Bank (ECB) has decided to lower its interest rates by 0.25 points, leaving the main reference at 3.25% (the deposit facility, automatically transferred to Euribor). The monetary institution continues to ease financing conditions given the moderation of inflation throughout the euro zone and to breathe oxygen into the economy, notably due to stagnation in Germany and weak growth in France.
“The disinflationary process is well underway,” said the Governing Council of the ECB in its press release on Thursday. Furthermore, during the usual press conference, the president of the institution, Christine Lagarde, highlighted “lower economic activity than expected”, mainly in the industrial sector, and also mentioned the drop in household spending or the slowdown in job creation. With “downside risks” due to threats of loss of confidence from businesses and families and the impact of the Israeli genocide on the Palestinian people of Gaza and also its attacks against Lebanon. The Frenchwoman, however, wanted to clarify that the growth of the economy is not the main concern of the ECB, since its mandate is price stability.
The institution lowered the official “price” of the currency three times (each time by 0.25 points) in this chapter of monetary austerity. The first, in June, marks the beginning of the end of an aggressive cycle of increases started in 2022 to fight inflation. The second, last month, after a technical adjustment, he left it at 3.5%.
This Thursday, the main decision-making body of the ECB met expectations. Forecasts (from investors and experts) which, in the longer term, have gone from a decline each quarter by the fall, until reaching a level of 2% or 2.25%, at the rate of five consecutive declines to achieve the same objective in spring. The next meeting of the ECB Governing Council will be held on December 12, when the institution’s economists will update their macroeconomic estimates.
Price increases have already moderated to 1.7% across the eurozone in September, at an inter-annual rate. And 1.5% in Spain. In other words, inflation is below the ECB’s theoretical target of 2%. At the same time, weak economic activity in some countries, including Germany and France, is evident. Especially in the industrial sector, Spain is a positive exception and leads in GDP growth among major EU economies. In this context, lowering the cost of financing conditions is essential, both for mortgaged families or those looking for a loan, and for businesses wishing to invest.
Of course, for now, financing conditions in the eurozone “remain restrictive,” which, in monetary parlance, means they continue to hurt demand. Furthermore, the Governing Council and Lagarde maintain the mantra that their decisions are “data driven” and are made “meeting by meeting”.
No mention of economic growth in his statement
“Inflation is expected to rise in the coming months, before falling back to target over the next year. Internal inflation remains high, because wages continue to increase at a high rate,” explains the press release published by the ECB this Thursday. A text in which it makes no reference at any time to economic growth, even if Lagarde l ‘ made at the press conference The statement ends forcefully: “The Governing Council does not commit in advance to a specific interest rate trajectory.”
“We run the risk of approaching a tipping point, where some companies might start to stop creating jobs because the recovery is coming too slowly, and then there could be a sort of snowball effect,” he recently said. said Governor Martins Kazaks about the central bank. of Latvia, one of the most aggressive “hawks” of the ECB Governing Council.
Their position is important because, fundamentally, the “hawks” are those who most clearly assume the threat that monetary austerity will end up causing a recession, since they give priority to moderating inflation. In fact, more moderate voices have been warning for months that monetary policy is an ocean liner that risks crashing if it starts veering too close to port.
In the most extreme scenario, in which rate hikes have gone too far and inflation falls below 2% within a year or more, the main fear would be deflation. It is an even more impoverishing “monster” than inflation because it would be linked to a recession and job destruction.
Thursday’s interest rate cut is “a step in the right direction”, recognizes Positive Money. “But with the slowdown in economic activity in the euro zone and the decline of economies like Germany, it is crucial to take more drastic measures,” continues this non-profit organization which works for a fairer monetary policy .
“Now that inflation is below the 2% target, the focus must be on supporting our economies and accelerating the investments we need most, particularly in the ‘green’ transition, which has been slowed down by high interest rates”, underline the experts at Positive Money. .
