At its meeting on 12 September, the European Central Bank (ECB) decided to lower the deposit facility rate by 25 basis points to 3.50%. In line with its new operational framework, the ECB cut the main refinancing operations rate to 3.65%, changing the spread with respect to the deposit rate to 15 basis points from 50 basis points. Meanwhile, the Bank reduced the marginal lending facility rate to 3.90%, as the spread between the refinancing rate and the lending rate will remain at 25 basis points. The decision fully aligned with market expectations.
In justifying its decision, the Bank stated that inflation has followed a trajectory consistent with its projections, falling to an over three-year low of 2.2% in August. Additionally, the Bank still expects inflation to return to the 2.0% target in H2 2025. Moreover, the Bank cut its GDP growth projections by 10 basis points for 2024, 2025 and 2026 due to softer domestic demand in the coming quarters, further motivating the cut. Nonetheless, the Bank expressed concerns regarding fast-paced wage growth and the stickiness of services inflation.
The ECB reiterated that it will keep policy rates sufficiently restrictive for as long as necessary to achieve its 2.0% medium-term inflation target. Nonetheless, it is clear that the easing cycle is not over: In the accompanying press conference, Governor Lagarde stated that “our path, of which the direction is pretty obviously a declining path, is not predetermined neither in terms of sequence nor in terms of volume”. Against this backdrop, the vast majority of our panelists expect the ECB to cut rates again before end-2024, with our Consensus currently pointing to a single 25 basis points cut, most likely in December. The next meeting is scheduled for 17 October.
Carsten Brzeski, global head of macro at ING, commented:
“Given the still high uncertainties, the ECB will probably also want to bank on something when taking the next rate decision. And as controversial as they sometimes are, the staff projections are the best thing to hold on to. Therefore, the next rate cut looks likely in December, not October, also given that there will not be a lot of important data releases between now and the October meeting.”
Similarly, Carlos Castellano and María Martínez, economists at BBVA Research, stated:
“All in all, today’s ECB meeting did not offer much new information, as widely expected, apart from making the second rate cut this year. The main interest lay in discerning the tone of the ECB’s statements regarding the timing of the next rate cut. With virtually no hints today, this meeting supports our expectation of a very gradual cycle of rate cuts, with one more rate cut in December.”
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