As expected, the European Central Bank cut interest rates for the second time this year.

Specifically, the ECB cut interest rates by 25 basis points. Therefore, the interest rate on the deposit acceptance facility is reduced to 3.50%. The interest rate on the main refinancing operations and the interest rate on the marginal financing facility are reduced to 3.65% and 3.90% respectively.

As the ECB states: Recent inflation data has been broadly in line with expectations and the ECB’s latest staff projections confirm the previous outlook for inflation. According to experts, headline inflation will average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections. Inflation is expected to pick up again towards the end of this year, in part because previous sharp declines in energy prices will no longer be factored into annual rates. Inflation is then expected to decrease to a level converging towards our target in the second half of next year. In terms of core inflation, the projections for 2024 and 2025 have been revised slightly upwards as service price inflation is higher than expected. At the same time, experts continue to expect a rapid decline in core inflation, from 2.9% this year to 2.3% in 2025 and 2.0% in 2026.”

At the same time, it is pointed out that domestic inflation remains high, as wages continue to rise at an increased rate. However, labor cost pressures are easing and earnings are partially offsetting the impact of higher wages on inflation. Financing conditions remain tight and economic activity remains subdued, reflecting subdued private consumption and private investment. Experts now forecast the economy to grow at a rate of 0.8% in 2024, which will accelerate to 1.3% in 2025 and 1.5% in 2026. This is a slight downward revision compared to the projections of June, which is mainly due to the smaller contribution of domestic demand in the following quarters.

The Governing Council of the ECB says it is determined to ensure that inflation returns to its medium-term target of 2% in time. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this goal. The Governing Council will continue to take an evidence-based approach and make decisions on a meeting-by-meeting basis to determine the appropriate extent and duration of the contractionary change in monetary policy. In particular, its interest rate decisions will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Board of Directors does not commit in advance to a specific course of interest rates.

“Unanimous decision”

Lagarde kept her cards closed on next moves on the interest rate front, sticking to her “meeting-to-meeting” rhetoric, saying there was no prior commitment to cut rates and no concrete roadmap for their de-escalation.

However, the decision to cut interest rates by 25 basis points was unanimous among ECB members, according to the president of the Bank.

“We felt that given the gradual de-escalation of inflation we had to ease the degree of monetary policy tightening,” Lagarde said.

September’s inflation forecast was “virtually unchanged” from June’s, he noted, adding that it was expected to return to the 2% target in 2025.

Asked about her predecessor Mario Draghi’s Report, she said the responsibility for the structural changes proposed in it rested with national governments, adding, however, that measures should be taken to improve the competitiveness and productivity of the European economy.

Responding to a question about Italy’s UniCredit taking over 4.5% of Germany’s Commerzbank, making it the bank’s second-largest shareholder after the German state, Lagarde referred to the ECB’s supervisory arm, the SSM, noting that it is responsible in order to examine whether this development affects the main supervisory indicators of the two banks, and reminded that the ECB does not normally comment on business movements between private credit institutions.

Analysts “see” a new decrease in December

Economists at Berenberg Bank predict that at the October 17 meeting the ECB will make no move, to be followed by another 25 basis point cut on December 12.

It is recalled that in June the ECB cut interest rates for the first time since 2019, keeping them unchanged at the July meeting.

What the reduction means for Greek borrowers

As reported earlier, today’s reduction does not mean anything special for Greek borrowers as the banks have frozen the housing interest rates corresponding to the three-month Euribor of 2.85%. At the moment Euribor is around 3.55% so it is even much lower and therefore the borrowers are protected. Based on analysts’ estimates of the path of interest rates, Greek borrowers are expected to see their loan installments fall sometime by June 2025.