As the Governing Council of the European Central Bank (ECB) decided on Thursday in Frankfurt, interest rates are being reduced by 50 basis points. In particular, the interest rates of the main refinancing operations, the marginal financing facility and the deposit acceptance facility are set at 4.25%, 4.50% and 3.75% respectively.

Some do reason for a “historic decision”. Not only because this is the first reduction in the cost of money since 2019 after many postponements and after ten consecutive interest rate hikes, but also because with today’s decision Frankfurt “emancipated” by the American Central Bank (Fed), which is still reluctant to cut interest rates. At a press conference after the meeting, the head of the ECB Christine Lagarde he said that today’s decision was not unanimous, and clarified that “from meeting to meeting” the possibility of a further reduction will be discussed.

The first reactions were mixed

Ulrich Kater, chief economist at Dekabank, told Reuters that the Frankfurt decision “is justified, based on the clear decline in inflation.” Along the same lines, Ulrich Reuter, head of the German Savings Association (DGSV), believes that “it was right to implement this particular step, which the markets had essentially discounted”, but maintains some reservations, because “care is still needed. The worst case scenario would be a return of inflation, which would force the ECB to withdraw an excessive rate cut”.

Jörg Kremer, Chief Economist of Commerzbank, expresses a diametrically opposite opinion. “I consider the interest rate cut by the ECB premature, which unfortunately had de facto committed in advance to proceed with this reduction, instead of taking into account the economic data, which indicate that it would be better to take a wait-and-see attitude,” the German economist tells Reuters. In his opinion, the new rise in structural inflation in the eurozone, but also the excessive increases foreseen by the new collective agreements for specific sectors of the economy do not justify optimism about the evolution of prices.

“The interest rate cut has been prepared in an excellent way and is documented in terms of monetary policy,” says Friedrich Heinemann, chief economist at the Center for European and Economic Research (ZEW) in Mannheim, Germany. “However”, he notes, “the fact that inflation persists is a negative surprise. From now on the Governing Council of the ECB should to show restraint in his pronouncements for further interest rate reductions”.

Is inflation “getting away” again?

The seemingly oxymoron is that, at the same time that it cuts interest rates, the ECB is revising its forecasts for the evolution of inflation in hand. It estimates that inflation will reach 2.5% in 2024 and 2.2% in 2025 (while the previous forecast, in March, spoke of 2.3% and 2.0% respectively). Christine Lagarde argues that all this is not a contradiction. “There is no doubt that the 2% inflation target will be achieved,” she says.

“The fact that the inflation forecast is being revised means perhaps further rate cuts will not be as important as originally estimated” supports the correspondent of the German network N-TV in Frankfurt. The next ECB Governing Council meeting, at which the course of interest rates will be on the agenda, is scheduled for July 18.

(dpa, Reuters, HB)