The European Central Bank (ECB) decided to reduce its deposit facility rate by 25 basis points, the interest rate that guides its monetary policy, during its meeting on Thursday.

According to the ECB’s updated assessment of inflation prospects, core inflation dynamics, and the transmission of monetary policy, the Governing Council announced that it deemed it appropriate to take another step toward easing the degree of restrictive monetary policy.

Recent inflation data aligns with expectations, and the ECB experts’ latest projections confirm earlier inflation forecasts. Experts anticipate that overall inflation will average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, consistent with the June forecasts.

Inflation is expected to rise again toward the end of this year, partly because the sharp declines in energy prices will no longer factor into annual rates. Afterward, inflation is projected to decrease and converge toward the ECB's target in the second half of next year.

Regarding core inflation, the projections for 2024 and 2025 have been slightly revised upward, as service price inflation has been higher than expected. At the same time, experts continue to predict a rapid decline in core inflation, from 2.9% this year to 2.3% in 2025 and 2% in 2026.

Domestic inflation remains high, driven by rising wages, according to the Bank. However, labor cost pressures are easing, and profits are partially offsetting the impact of higher wages on inflation. Financing conditions remain tight, and economic activity continues to be sluggish, reflecting weak private consumption and private investment.

Experts now predict that the economy will grow by 0.8% in 2024, accelerating to 1.3% in 2025 and 1.5% in 2026. This represents a slight downward revision from the June forecasts, mainly due to weaker domestic demand in the coming quarters.

The ECB Governing Council is committed to ensuring inflation returns to its medium-term target of 2%. It will maintain sufficiently restrictive policy rates for as long as necessary to achieve this goal. Additionally, the Council will continue to base its decisions on available data and determine the appropriate extent and duration of monetary policy tightening on a meeting-by-meeting basis.

Specifically, decisions regarding interest rates will depend on the Council’s assessment of inflation prospects in light of incoming economic and financial data, core inflation dynamics, and the intensity of monetary policy transmission.

The Governing Council emphasized that it is not pre-committed to any specific interest rate path.

Key ECB Interest Rates

• The deposit facility rate will be reduced to 3.50%.

• The main refinancing operations rate will decrease to 3.65%.

• The marginal lending facility rate will decrease to 3.90%.

These changes will take effect on September 18, 2024.