ECB Rate Cut Lowers Deposit Facility Rate to 3.75%

In its monetary policy decision, the Governing Council said that, based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it was now appropriate to moderate the degree of monetary policy restriction. Since its September 2023 meeting, inflation has fallen by more than 2.5 percentage points and the outlook has improved markedly.

What the ECB said about inflation

The ECB stressed that domestic price pressures remain strong because wage growth is elevated, and that inflation is likely to stay above target well into next year. The latest Eurosystem staff projections revised headline and core inflation up for 2024 and 2025 compared with March. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, with inflation excluding energy and food at 2.8%, 2.2% and 2.0%. Growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.

The Governing Council said it is determined to return inflation to its 2% medium-term target in a timely manner, will keep rates sufficiently restrictive for as long as necessary, and will follow a data-dependent, meeting-by-meeting approach without pre-committing to a particular rate path.

Balance sheet

The Governing Council confirmed it will continue to reinvest in full the principal payments from maturing securities under the pandemic emergency purchase programme until the end of June 2024, then reduce the PEPP portfolio by €7.5 billion a month on average over the second half of the year, and discontinue PEPP reinvestments at the end of 2024. The asset purchase programme portfolio continues to decline as maturing principal is no longer reinvested.

What it means

For borrowers in the euro area, the decision should feed through gradually into variable-rate loans and new lending, although the ECB has signalled no commitment to further cuts. Banks will see a lower rate paid on deposits held at the central bank. Companies planning refinancing, acquisitions or capital markets transactions will watch the next meetings closely, given the ECB's emphasis on incoming economic and financial data, underlying inflation and the strength of transmission.

Sources

• European Central Bank: Monetary policy decisions, 6 June 2024
• European Central Bank: Eurosystem staff macroeconomic projections for the euro area, June 2024