According to an ECB announcement, the Governing Council decided today (6/6) to reduce the ECB's three key interest rates by 25 basis points. Based on the updated assessment of inflation prospects, underlying inflation dynamics, and the intensity of monetary policy transmission, it is now deemed appropriate to moderate the degree of restrictive monetary policy after nine months of stable rates.

Since the September 2023 Governing Council meeting, inflation has decreased by over 2.5 percentage points, and the inflation outlook has significantly improved. Core inflation has also declined, indicating weakened price pressures and lowered inflation expectations across all horizons. Monetary policy has kept financing conditions restrictive, curbing demand and stabilizing inflation expectations, significantly contributing to lowering inflation levels.

Despite today's rate cut, recent remarks by ECB officials suggest no pre-commitment to future reductions. This implies that a further rate cut in July remains uncertain, as the ECB aims to maintain flexibility in its decisions and continue monitoring economic data.

Inflation in the Eurozone increased to 2.6% in May, above the expected 2.5%, while core inflation rose to 2.9% from 2.7% in April. Despite progress in recent quarters, domestic price pressures remain strong due to rising wages, and inflation is likely to stay above target for much of the next year. The latest Eurosystem expert projections have revised overall and core inflation forecasts upward for 2024 and 2025 compared to March projections. Experts now expect average headline inflation to be 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. For inflation excluding energy and food, they forecast averages of 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026. Economic growth is expected to accelerate to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.

The Governing Council is determined to ensure that inflation returns to its medium-term target of 2% in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this goal. The Council will continue a data-driven approach, making decisions meeting-by-meeting regarding the appropriate degree and duration of monetary policy adjustments. Specifically, its rate decisions will be based on its assessment of inflation prospects in light of incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Governing Council does not pre-commit to a specific interest rate path.

The Governing Council decided to reduce the ECB’s three key interest rates by 25 basis points. Consequently, the interest rate on the main refinancing operations, as well as the rates on the marginal lending facility and the deposit facility, will be lowered to 4.25%, 4.50%, and 3.75%, respectively, effective June 12, 2024.

The APP portfolio is being reduced at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. The Governing Council confirmed today that it will reduce the assets held under the PEPP by an average of €7.5 billion per month during the second half of this year. The detailed terms of this reduction will be broadly similar to those applicable to the APP.

The Governing Council will continue to reinvest fully the principal payments from maturing securities purchased under the PEPP until the end of June 2024. During the second half of the year, it will reduce the PEPP portfolio by an average of €7.5 billion per month. The Council intends to terminate PEPP reinvestments by the end of 2024. Flexibility in reinvesting the principal payments from maturing PEPP securities will continue to address risks to monetary policy transmission related to the pandemic.

As banks repay the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted funding operations and ongoing repayments contribute to its monetary policy stance.