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Informist, Thursday, Sep 12, 2024

 

MUMBAI – The European Central Bank today reduced its key deposit facility rate by 25 basis points to 3.50%, in line with the expectations of markets and economists. The interest rates on the main refinancing operations and the marginal lending facility were revised to 3.65% and 3.90%, respectively. The central bank had kept rates unchanged at its previous meeting in July.

 

"Based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction," the bank said in a statement.

 

The ECB also implemented some key operational changes announced in the March meeting, reducing the spread between the marginal refinancing operations rate and the deposit facility rate to 15 bps from 50 bps earlier to incentivise bidding in the weekly operations.

 

Reiterating its aim of bringing inflation closer to the 2% target, the bank said, "The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim." It refused to commit itself to any particular rate trajectory.

 

The central bank kept its headline inflation outlook unchanged but remarked on inflation picking up later in the financial year. "Inflation is expected to rise again in the latter part of this year (2024-25), partly because previous sharp falls in energy prices will drop out of the annual rates," read the statement. The bank said that over the second half of 2025, inflation should decline towards the ECB's target of 2%.

 

For core inflation, the bank said, "The projections for 2024 and 2025 have been revised up slightly, as services inflation has been higher than expected. At the same time, staff continue to expect a rapid decline in core inflation, from 2.9% this year to 2.3% in 2025 and 2.0% in 2026".

 

The central bank said domestic inflation remained high as wages were rising at a fast pace, but the risk was offset by moderating profits. The regulator highlighted the underlying weakness in the private sector as it talked about financing conditions remaining restrictive, leading to subdued economic activity.

 

Owing to weaker domestic demand over the next few quarters, the central bank revised its growth projections downwards by 10 bps, compared to the June meeting. The bank said it expects the economy to grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. At the June policy, the bank forecast a growth of 0.9% for 2024, 1.4% in 2025, and 1.6% in 2026.

 

In June, the ECB cut the deposit interest rate for the first time since September 2019 to 3.75%. The main refinancing operations rate and the marginal lending rate were cut for the first time since March 2016 by 25 bps each to 4.25% and 4.50%, respectively.  End

 

Reported by Kabir Sharma and Srijita Bose

Edited by Rajeev Pai

 

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