The European Central Bank (ECB) is expected to reduce its key interest rate by 0.25% on Thursday. Simultaneously, the ECB is anticipated to implement larger reductions in its two other key rates (main refinancing and marginal lending rates) to narrow the significant gaps that currently exist between them.

Currently, the deposit facility rate—considered the key interest rate that largely determines interbank market rates—stands at 3.75%, while the main refinancing rate (the rate at which banks borrow from the ECB) is at 4.25%, and the marginal lending rate is at 4.5%.

In other words, the first two rates differ by 0.5%, but the ECB's intention is to narrow this gap to 0.15%.

Therefore, if market expectations are correct and the ECB proceeds with another rate cut tomorrow, the deposit rate (key rate) will be reduced to 3.5%, the main refinancing rate to 3.65% (a larger decrease of 0.6%), and the marginal lending rate will be set at 3.9%. This move, especially in more competitive Eurozone markets, could benefit borrowers, as the reduced cost of liquidity for banks (following the larger percentage cut in the refinancing rate) may be passed on to loan interest rates.

This technical adjustment, according to ECB officials, is necessary. As the ECB gradually reduces the liquidity provided through its quantitative easing measures—primarily through bond purchases and reinvestment of bonds already held in the Central Bank's portfolio—banks will increasingly rely on the "traditional source" of liquidity. This refers to the liquidity offered by the ECB through its main refinancing operations, now at a lower rate, closer to the deposit rate.

Recent inflation data, despite a slight increase in July, and the economic growth in the Eurozone, support the arguments of those predicting two more rate cuts from the ECB this year. It’s worth noting that the annual inflation rate in the European Union was 2.8% in July 2024, up from 2.6% in June. A year earlier, the rate was 6.1%. In July 2024, services contributed the most to the annual inflation rate in the Eurozone (+1.82 percentage points), followed by food, alcohol, and tobacco (+0.45 points), non-energy industrial goods (+0.19 points), and energy (+0.12 points).

On the other hand, the European economy continued to grow at a weak pace in the second quarter, though conditions have improved since the end of 2023 when growth was flat.

Specifically, in the second quarter of 2024, seasonally adjusted GDP increased by 0.3% in both the Eurozone and the EU compared to the previous quarter. In the first quarter of 2024, GDP also grew by 0.3% in both regions, following two consecutive quarters of zero growth in the Eurozone. Compared to the same quarter last year, seasonally adjusted GDP rose by 0.6% in the Eurozone and 0.8% in the EU in the second quarter of 2024, after a 0.5% increase in the Eurozone and 0.6% in the EU in the previous quarter.