TLDR:
- ECB cut deposit rate by 25 basis points to 3.50%
- Lagarde signals ECB open to October cut, but December more likely
- Italian ministers criticized ECB for not cutting rates more aggressively
- Lagarde rebuffed political pressure, affirming ECB’s independence
- Markets see 25% chance of rate cut in October
The European Central Bank (ECB) has taken a significant step in its monetary policy by cutting its deposit rate by 25 basis points to 3.50%.
This move, announced on Thursday, marks the second quarter-point reduction since June and reflects the ECB’s response to the latest retreat in inflation, which has brought the rate close to their 2% goal.
ECB President Christine Lagarde provided insights into the bank’s future plans, indicating that while the ECB is open to considering an interest-rate cut in October, a move in December appears more likely.
Lagarde emphasized that the ECB would need to see a significant change relative to their baseline projections to reassess their position before December.
The decision to cut rates and the subsequent commentary have sparked reactions from various quarters, including criticism from Italian government officials.
Two Italian ministers expressed disappointment with the ECB’s actions, accusing the central bank of a lack of courage and calling for more aggressive rate cuts. Foreign Minister Antonio Tajani went further, suggesting that the ECB’s founding treaty should be reformed to promote growth alongside inflation control.
In response to these political pressures, Lagarde firmly restated the ECB’s independence. Speaking at an informal meeting of EU economy ministers in Budapest, she emphasized,
“The European Central Bank is an independent institution, it’s very clearly stated in the treaties. We are not subject to political pressure of any sort.”
The ECB’s decision-making process is being closely watched by financial markets, which currently see a 25% chance of a rate cut in October.
This relatively low probability aligns with comments from ECB officials like Martins Kazaks of Latvia, who noted that while an October cut is possible, it would likely require an unexpected economic downturn or a significant decline in inflation.
Eurozone Challenges
The central bank’s actions are set against a backdrop of economic challenges in the eurozone. While inflation is showing signs of retreating, concerns persist about lingering price pressures in the services sector.
The euro zone’s economy is facing headwinds, with manufacturers still grappling with higher energy costs and soft demand beyond the 20-nation currency bloc.
ECB officials are maintaining a cautious stance. France’s Francois Villeroy de Galhau advocated for a gradual approach to lowering rates, emphasizing pragmatism and optionality in future meetings.
Others, like Lithuania’s Gediminas Simkus, pointed out that while rates will continue to decline, the speed of cuts will depend on incoming economic data.
The ECB’s latest quarterly forecasts, released alongside the rate decision, paint a mixed picture. While inflation is expected to reach the 2% target by the end of next year, economic growth projections for 2024, 2025, and 2026 have been revised downward.
This economic outlook is complicating the ECB’s task of balancing inflation control with supporting economic growth.
Lagarde and her colleagues are keeping their options open, ready to respond to significant changes in economic conditions.
However, barring any major surprises, the next comprehensive set of economic data will only be available at the December meeting, making it the more likely time for the next policy move.
