The European Central Bank (ECB) has cut its key interest rates for the third time in 2024, lowering them by 25 basis points. This decision comes in response to slowing growth rates in the Eurozone and lower inflation than the 2% target as recorded by Eurostat.
Interest rates down from June
Since June, the ECB started the cycle of interest rate cuts, with a temporary pause in July. The current ECB interest rate level for deposits, main refinancing and marginal funding is now set at 3.25%, 3.40% and 3.65% respectively, with the decision taking effect from 23 October. The reduction is aimed at supporting the economy and liquidity, given the impact of falling demand and rising costs.The monetary easing is part of the ECB's overall effort to support the stability and growth of the euro area. At the same time, the Bank is reviewing the inflation path and the economic situation to take future decisions. Updated data influencing this decision show that Eurozone growth remains low and is projected to reach just 0.8% for 2024, while estimates for 2025 are also lower.
The aim is to stop the reinvestment of PEPP
The reductions in interest rates are closely linked to the ECB's policy of reducing the size of the Asset Purchase Programmes (APP) and PEPP. The APP is proceeding with a gradual reduction without reinvesting funds from redeemed bonds. Meanwhile, the PEPP, designed to deal with the pandemic crisis, is expected to be reduced by €7.5 billion per month. The ECB intends to stop reinvesting the PEPP at the end of 2024, with flexibility to address future monetary policy contagion challenges; in addition, the ECB is closely monitoring the progress of bank refinancing and the continuation of repayments. Targeted refinancing operations are part of the Bank's strategy to support banks and economic stability. The ECB is committed to keeping interest rates at sufficiently restrictive levels to ensure that inflation returns to the medium-term target of 2%. The Governing Council plans to review its strategy at each meeting, while retaining the flexibility to make adjustments depending on the economic data collected.
Maintaining financial stability
The ECB's broader approach focuses on maintaining financial stability, with the aim of preserving profits and reducing inflationary pressures, while emphasising how the overall strategy can respond to economic conditions in real time, without pre-commitment to the future.