ECB Cuts Rates, Expresses Caution on Its Next Steps

Three benchmark rates were cut by 25 basis points in the June 6, 2024 session

As expected, and as European central bank governors had anticipated, the European Central Bank (ECB) cut interest rates by 25 basis points. That means interest rates on the main refinancing operations, margin lending, and deposit facility will be cut to 4.25%, 4.50%, and 3.75% respectively.

The decision was made “on the basis of an updated assessment of the inflation outlook, the dynamics of core inflation, and the intensity of transmission monetary policy,” the ECB note says. Therefore, it was established that inflation has fallen by more than 2.5 percentage points since September 2023, and the inflation outlook has improved significantly.

In any case, great caution remains on the next steps of monetary policy, the priority always being “to ensure that inflation returns to the medium-term target of 2% in a timely manner.” The Commission explains that “despite the progress made in recent quarters, strong domestic price pressures remain, as wage growth is high; inflation is likely to remain above target through much of next year. The Eurosystem staff’s latest forecasts for overall and core inflation have been revised upwards for 2024 and 2025 from their March projections.”

This indicates that overall inflation will be 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, while inflation net of the energy and food component will reach 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026. At the same time, growth would be 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.