The European Central Bank (ECB) cut all three interest rates at its September meeting while implementing a technical adjustment to reduce volatility in money markets (where very short-term cash and reserves are traded). The ECB thus made its second rate cut of the year (it had already lowered the price of money in June, then maintained it at the July meeting) with a 25 basis point cut in the deposit rate (which banks maintain liquidity) to 3.5%, while the main refinancing rate (the rate at which banks request liquidity on a weekly basis) was cut by 60 basis points to make it more attractive, falling to 3.65%. Finally, the marginal credit facility (the emergency window) It was also lowered by 60 basis points to 3.9%.. In this way, the interest rate corridor narrows considerably and makes the weekly liquidity auctions more attractive for banks, as they are now much “cheaper” and have a rate close to that of the interest rate deposit, as the press release explains.
This rate cut comes in the midst of a powerful disinflation process that is not over, but has been more than notable. It is worth remembering that CPI was 10.6% in October 2022. Today, headline inflation fell to 2.2% in August, very close to the 2% target. The drastic drop in oil prices is partly making this disinflation possible. Crude oil has fallen by 18% since July. Follow the press conference of Christine Lagarde, President of the ECB, here live.
In addition, the economists of the Eurosystem (composed of the ECB and the rest of the national central banks of the euro area countries) have been updating their forecasts for inflation and economic activity once a quarter. The last time was in June, so today it was time to discover the new macro chart.
Experts have ruled out major changes.”We should have a little less growth in the short term“, slightly higher inflation in 2024 and unchanged medium-term outlook,” Bank of America (BofA) analysts estimated in a report yesterday.
What will happen in October?
Ahead of Thursday’s meeting, Tomasz Wieladek, chief economist at T. Rowe Price, expected the organization’s president to emphasize that monetary policy “continues to depend on both data and forecasts.” So, given “volatile data flows,” he said, “the ECB will remain cautious” in the near future. “A quarterly rate of reduction remains the most likely outcome” concluded Wieladek.
However, this reduction was taken into account given the moderation of inflation and the still high level of interest rates, today higher than inflation. Now, what is interesting is to analyze the indices to see what will happen in the next meetings.
An argument for a cut in October could be that inflation in August only slightly exceeded the 2% target and is not expected to change much in September and October due to base effects and the current weakness in energy prices. In addition, supporters of the ECB Governing Council are increasingly stressing their concerns about the weakness of the economy. In fact, ECB experts are also expected to slightly reduce their economic forecasts. However, there are also doubts about this possible cut.
For example, Lithuanian Central Bank Chairman Gediminas Simkus, who is considered a “neutral” member, called a rate cut in October “highly unlikely” in a recent interview. This is because many members of the Board, including some moderates, continue to emphasize the importance of projections for their interest rate decisions.
