ECB Cuts Deposit Rate by 25 Basis Points

As expected, the European Central Bank (ECB) on Thursday cut its key interest rates, reducing the deposit rate by 25 basis points amid struggling economic growth and cooling inflation in the Eurozone. The ECB's main refinancing operations rate aligned with forecasts at 3.65%, while the deposit facility rate met expectations at 3.5%.

author: Economician

Reading Time:

2 minutes

category:economy

While the ECB cut rates for the second time this year, it flagged persistent inflationary pressures, potentially dampening the outlook for further reductions in borrowing costs over the rest of the year. In July, the ECB had left its benchmark deposit rate unchanged at 3.75%, after cutting it from an all-time high of 4% in June.

In its economic forecasts, ECB policymakers did not change their inflation projections for the next two years but expect an increase in inflation in the last quarter of the current year. The statement noted: "Inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates. Inflation should then decline towards our target over the second half of next year." The ECB's target is 2%.

ECB policymakers see headline inflation averaging 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, unchanged from their June projections.

Regarding core inflation, ECB staff raised their projections for 2024 and 2025 slightly but still expect a rapid decline from 2.9% this year to 2.3% in 2025 and 2% in 2026.

Thursday's decision comes as the Federal Reserve is also widely expected to begin lowering borrowing costs next week.

Thirty minutes after the release of the statement, Christine Lagarde, President of the ECB, explained the decision to lower the benchmark interest rate by 25 basis points at the September policy meeting and responded to questions from the press. Here are the most important points from her speech: