Agencies
With inflation slowing toward its medium-term target, the European Central Bank (ECB) cut its benchmark interest rate Thursday to prop up faltering growth with lower borrowing costs for companies and homebuyers.
The bank’s rate-setting council lowered the deposit rate by 25 basis points from 3.75% to 3.5% at a meeting at its skyscraper headquarters in Frankfurt.
European Central Bank, which oversees the monetary policy of the eurozone, delivered the second cut this year as inflation slows and economic growth dwindles but provided no substantial clues to its next step, even as investors bet on steady policy easing in the months ahead.
With the cut widely expected, investor attention has already shifted to what will come next and how ECB decisions will be shaped by the U.S. Federal Reserve’s (Fed) widely expected start to its own rate-cutting next week. But the ECB, the central bank for the 20 countries that share the euro, gave nothing away.
"We are not pre-committing to a particular rate path,” ECB President Christine Lagarde told a press conference, using the bank’s standard formula for what it calls its "data-dependent,” meeting-by-meeting approach to policy.
"We are looking at a whole battery of indicators,” she said, noting that September was likely to deliver a low inflation reading simply because of statistical base effects.
Euro assets were slightly changed by the move and by the absence of clues on the future rate path, which analysts interpreted as evidence of the ECB’s caution."Given that the ECB’s track record of predicting inflation on its way up is rather weak, the ECB will want to be entirely sure before engaging in more aggressive rate cuts,” said Carsten Brzeski, Global Head of Macro at ING.Inflation is now down to 2.2%, close to the bank’s target of 2%, thanks in part to lower global prices, allowing the ECB to shift its focus to concerns about growth that has been held back by high rates.
The Fed is also widely expected to cut rates from a 23-year high at its meeting on Sept. 17-18.However, experts don’t expect a rapid series of rate cuts from either central bank to anywhere near the rock-bottom levels from before the 2020 outbreak of the COVID-19 pandemic. They say the ECB will tiptoe rather than slash and might cut rates only one more time this year. Inflation is down with the help of lower oil prices.
Lagarde painted a mixed picture of inflation in the euro area continuing to be sustained by rising wages even as overall labor cost pressures moderated and were absorbed by companies.
More dovish ECB policymakers, mainly from the euro zone’s south, have been arguing that recession risks are rising and high ECB rates are now restricting growth far more than needed, raising the risk that inflation could undershoot the target.
But inflation-wary hawks, who are still in the majority, say the labor market remains too hot for the ECB to sit back, and that underlying price pressures, as evidenced in stubborn services costs, raise the risk inflation could surge again.
New economic forecasts did little to settle the debate.
Quarterly projections from the ECB’s staff showed that growth this year will be slightly lower than forecast in June, while inflation will still only be seen back at target in the second half of next year.
That means few, if any, policymakers are likely to argue against further easing, with the key divide being how quickly the ECB should move.
Hawkish policymakers have clarified that they see quarterly rate cuts as appropriate since key growth and wage indicators – which inform the ECB’s projections – are compiled every three months.
Investors are also divided, with another cut by December fully priced into financial markets, but the chance of an interim move in October is wavering between 30% and 50%.With Thursday’s move, the ECB’s deposit rate will fall by 25 basis points to 3.5%. The refinancing rate, however, was cut by a much bigger 60 basis points to 3.65% in a long-flagged technical adjustment.The gap between the two interest rates had been set at 50 basis points since September 2019, when the ECB was pumping stimulus into the economy to avert the threat of deflation.
It announced plans in March to narrow the corridor to 15 basis points from Thursday’s meeting to encourage the eventual rekindling of lending between banks.
Such a revival is still years away, so the ECB’s move is a pre-emptive adjustment of its operating framework.
For now, banks are sitting on 3 trillion euros of excess liquidity, which they deposit with the ECB overnight, making the deposit rate, in effect, its main policy instrument.
Over time, this liquidity should dwindle, pushing banks to borrow again from the ECB at the refinancing rate, which is traditionally the central bank’s benchmark interest rate.