ECB Rate Cut Aligned With Market Expectations and Balanced by Explicit Non-Commitment to Any Particular Future Path In Rates – Currency Thoughts
ECB Rate Cut Aligned With Market Expectations and Balanced by Explicit Non-Commitment to Any Particular Future Path In Rates
June 6, 2024
The ECB’s first interest rate cut since 2016 was by just 25 basis points and clearly telegraphed to market participants in advance. The refinancing rate had been lifted from zero percent sustained for over six years through July 2022 to 2.50% by end-2022 and 4.50% by September 2023. Such now becomes 4.25% and will be surrounded by a 3.75% deposit rate and a 4.5% Marginal Lending Facility rate that define the central bank’s interest rate corridor. In addition, a continuing shrinkage of asset holdings acquired through the APP program remains in place, and PEPP-acquired assets will begin a similar runoff starting in July at a pace of EUR 7.5 billion per month.
After taking these steps, the main message today is that monetary policy remains quite restrictive, guided by the paramount objective of returning inflation to the 2.0% target by late 2025. Officials
will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.
Upside inflation risks such as service sector price stickiness, elevated wage growth, heightened geopolitical tensions, weather extremes, and the broader effect of unfolding climate change on food prices warrant continuing policy caution, even though it’s welcoming that indicators of future inflation remain well-anchored.
The ECB’s macroeconomic forecasts were updated as is done customarily on a quarterly basis. While projected GDP growth this year was revised 0.3 percentage points higher to 0.9%, likely growth in 2025 was lowered to 1.4% and left at 1.6% for 2026. Projected total CPI inflation doesn’t edge just under 2.0% until 2026, and core inflation traces a glide path averaging 2.8% this year, 2.2% in 2025 and 2.0% in 2026.
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