The Governing Council of the European Central Bank (ECB) decided at its meeting today to cut the deposit facility rate by 25 basis points to 3,50 percent. In June, the central bank had already initiated the first rate cut, marking a turning point for interest rates in the eurozone.

The decision was based on the ECB Governing Council’s updated assessment of inflation prospects, the dynamics of underlying inflation, and the strength of monetary policy transmission, as stated in the announcement. It is now appropriate to take another step in reducing the degree of monetary policy tightening.

Inflation outlook confirmed

The latest inflation data came in largely as expected, and the most recent projections from ECB experts confirm the previous inflation outlook. The forecast continues to predict an overall inflation rate of 2,5 percent for 2024, 2,2 percent for 2025, and 1,9 percent for 2026.

An uptick in inflation is expected in the final part of this year. One contributing factor is that the significant previous declines in energy prices will no longer be reflected in the annual rates. Over the second half of next year, inflation is expected to move toward the 2 percent target.

The projections for core inflation have been revised slightly upward for 2024 and 2025, the ECB added. This adjustment is attributed to higher-than-expected price increases in services. Core inflation is expected to reach 2,9 percent for this year, 2,3 percent in 2025, and 2,0 percent in 2026.

Economic growth expectations slightly lower

In contrast, economic growth expectations have been lowered slightly. They now forecast GDP growth of 0,8 percent in 2024, 1,3 percent in 2025, and 1,5 percent in 2026. This is primarily due to weaker domestic demand contributions in the coming quarters.

Weakened demand and consumption

The still rapid pace of wage increases is expected to keep domestic inflation elevated. Corporate profits are cushioning the impact of higher wages on inflation to some extent. Financial conditions remain restrictive, and economic activity is still subdued, reflecting weak private consumption and investment activity, according to the central bank.

As previously announced, the ECB has set the spread between the rate on the main refinancing operations and the deposit facility rate at 15 basis points as of September 18. As a result of the rate cut, the main refinancing operations rate will decrease to 3,65 percent, and the rate on the marginal lending facility will drop to 3,90 percent.