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ECB: Historic interest rate cut of 25 basis points

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ΕΚΤ: Ιστορικ or μεση εικων κονδ&epsilon ;ς βσης

The deposit rate stands at 3.75%

After nine months of maintaining the rate at a historic high of 4%

strong>the European Central Bank has decided to cut its interest rate by 25 basis points to 3.75%. Something that markets and analysts have been waiting for for some time. The main refinancing rate, the marginal funding facility and the deposit facility will be reduced to 4.25%, 4.50% and 3.75%, respectively, with effect from 12 June 2024.

< p>The decision gives a lead and differentiates the ECB from the US Federal Reserve, which is expected to keep interest rates unchanged at next week's meeting.

Although the road to easing inflationary pressures towards the 2% target is difficult, President Christine Lagarde said in May that inflation in the 20-nation eurozone was “under control” after its historic surge. That put the ECB on a path to easing monetary policy ahead of the Federal Reserve or the Bank of England, where the problem is proving more persistent. However, the ECB also revised average annual inflation to 2.5% for 2025, from 2.3% forecast at the March meeting.

The forecast for 2025 was increased to 2.2 % from 2%, while the outlook for 2026 remained at 1.9%.

Swiss National Bank has taken the lead in reducing interest rates among Western central banks. Sweden's central bank followed and yesterday Canada's central bank became the first G7 bank to scale back borrowing costs.

“The Governing Council decided today to cut the ECB's three key interest rates by 25 basis points.” the statement said “Based on the updated assessment of the outlook for inflation, the dynamics of core inflation and the strength of monetary policy transmission, it is now appropriate to ease the degree of monetary policy accommodation after nine months of holding interest rates steady. Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5% and the outlook for inflation has improved markedly. Core inflation has also eased, reinforcing signs that price pressures have eased, and inflation expectations have eased across the board. Monetary policy kept financing conditions tight. By weakening demand and keeping inflation expectations well anchored, this has contributed significantly to bringing inflation back down.”

The Inflation Forecast

The central bank estimates that despite the progress of the last quarters, inflationary pressures are strong, mainly due to wage increases and points out that inflation may remain above the target in 2025 as well, revising its forecasts upwards. “The latest Eurosystem staff projections for both core and inflation have been revised upwards for 2024 and 2025 compared to the March projections. The staff now sees headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, the staff projects an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to accelerate to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.”

Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)

The APP portfolio is being reduced by measured and predictable pace, the announcement states, as the Eurosystem no longer reinvests capital payments from maturing securities.

The d.s. will continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP until the end of June 2024. In the second half of the year, it will reduce the PEPP portfolio by €7.5 billion per month average. The d.s. intends to stop PEPP reinvestments at the end of 2024.

It will continue to apply flexibility to the reinvestment of maturing purchases in the PEPP portfolio to address risks to the monetary policy transmission mechanism that related to the pandemic.

Source: 24h.com.cy

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