On Thursday, September 12, the European Central Bank (ECB) decided to cut interest rates again.
The mentioned decision of the European financial regulator is largely because currently there is a tendency in the relevant region of the world to slow down the pace of the inflationary process. At the same time, a decrease in the economic growth rate is now being recorded in the eurozone. The ECB defines the current realities as a state of affairs containing such factors and circumstances that can reasonably be interpreted as arguments in favor of continuing to implement the concept of monetary policy easing, which began in June.
It is worth noting that the European financial regulator, against the background of the announcement of the decision on lowering the cost of borrowings, did not make any statements that would contain direct signals or indirect hints about which strategy would materialize shortly. In this case, the concept of the ECB’s activities in the context of monetary policy is implied. It is also worth noting that investors mainly expect that in the coming months, the European financial regulator will continue to lower the cost of borrowing gradually.
On Thursday, ECB officials decided to cut the deposit rate by 25 basis points. Now the corresponding indicator is at 3.50%. It is worth noting that this decision of the European financial regulator generally coincided with most of the preliminary expectations.
Currently, inflation in the eurozone is in a kind of territory bordering on the ECB’s 2% target. The European economy is on the verge of implementing a negative recession scenario.
Since the decision to cut interest rates was actively predicted and did not come as a surprise or a sensation, investors’ attention is already more focused on the further actions of the ECB. Also in this context, special interest extends to the impact that the results of the meeting of Federal Reserve officials scheduled for next week will have on the monetary policy strategy of the European financial regulator. It is worth noting that in the era of globalization, which is a characteristic feature of the current configuration of the world in terms of its perception in the context of defining it as an economic, social, and political space, the interdependence and interconnectedness of central bank decisions is at a high level. The present global economic reality provides for the close interaction of many national trade, production, and financial systems. In this context, the Fed’s actions are a source of widespread impact. The corresponding circumstance is concerned with the fact that the United States economy is currently the largest in the world. It is worth noting that nowadays, expectations are most widespread in the markets and among investors that officials of the US central bank will decide on easing monetary policy during the September meeting.
The ECB has so far not commented on the assumptions about the potential impact of the Fed’s decision on the strategy of the European financial regulator.
ECB President Christine Lagarde said during a press conference on Thursday that the financial institution she heads is not pre-committing to a particular rate path. It is worth noting that this position is typical for financial officials in many regions of the world. For example, the Fed also does not seek to commit itself to any actions related to changes in the monetary policy strategy. A kind of consensus has formed among officials of the central bank of the United States, according to which, before making adjustments to the cost of borrowing, it is necessary to obtain the maximum possible amount of information materials about the state of affairs in the economy and the prospects for the subsequent dynamic of the corresponding situation. The ECB, as part of its approach to monetary policy, adheres to what can be described as a data-driven methodology of action. In this case, decisions regarding interest rates are made taking into account the economic background observed during the meeting of officials of the financial institution.
Christine Lagarde said that the ECB is looking at a whole battery of indicators. She also noted separately that inflation in the eurozone is likely to be low in September due to statistical base effects.
Assets in euros showed almost no changes against the background of the news about the ECB’s decision to continue monetary policy easing. Also, in this case, no reaction was recorded to the fact that the European regulator did not signal the most likely further decisions regarding the level of borrowing costs. Analysts interviewed by media representatives say that the lack of statements on follow-up actions is evidence of the ECB’s caution. Such tactics are justified against the background of the lack of economic certainty, which is observed at the global level and has a large-scale character, spreading to many regions of the world.
Carsten Brzeski, Global Head of Macro at ING, says that, given the ECB’s track record of predicting inflation on its way up is rather weak, the European financial regulator wants to be fully confident before starting a more aggressive monetary easing.
Christine Lagarde on Thursday made statements based on which an idea is being formed about the current inflationary process in the eurozone as an ambiguous state of affairs. According to her, inflation in this region is continuing to be sustained by rising wages. The corresponding situation is observed, even though overall labor cost pressures moderated and were absorbed by companies.
ECB policymakers, who are not supporters of aggressive actions, say that the risks of a recession scenario are currently increasing. Also, according to them, the high rates of the European financial regulator nowadays limit economic growth much more than necessary. Proponents of the relevant point of view say that the mentioned circumstance contributes to the rising risk that inflation could undershoot the target. It is worth noting that such a vision of the current state of affairs in the eurozone economy is most characteristic of the ECB policymakers from the southern countries of the appropriate region.
At the same time, today the so-called hawkish position dominates among the officials of the financial institution headed by Christine Lagarde. Proponents of the appropriate approach are aimed at aggressive actions, defining as their main goal the most effective counteraction to inflation. In their opinion, the ECB cannot but react to the situation in the labor market in the eurozone. They say that the situation in the mentioned space is too hot. Also, this group of ECB officials notes that price pressure continues. According to them, the evidence of the existence of the relevant factor is the high prices for services. They characterize this circumstance as a source of risk that inflation may show growth in the foreseeable future.
The new forecasts released by the ECB do not contribute to the settlement of discussions about which strategy of action of the European financial regulator is the most constructive and contains the most optimistic potential. The financial institution, headed by Christine Lagarde, expects the eurozone economy to grow by 0.8% in 2024. It is worth noting that the previous version of this forecast provided an increase in the mentioned indicator by 0.9%. ECB officials explained the deterioration in expectations by the fact that the contribution of domestic demand to the growth of the eurozone economy turned out to be weaker compared to expectations. Also, in the relevant context, it was noted that inflation is expected to reach the target of the European financial regulator only in the second half of 2025.
The mentioned statements and estimates most likely mean that most ECB officials will not be against further easing of monetary policy. It is worth noting that currently there is no definitive understanding of how quickly the European financial regulator should act in the context of cutting interest rates as a kind of response to the state of affairs in the economic environment.
Currently, those ECB officials who are supporters of aggressive measures and perceive the fight against inflation as the main goal unequivocally declare their agreement with lowering the cost of borrowing every quarter. To a certain extent, this position is related to the fact that the most important indicators of economic growth and the dynamic of wages are compiled every three months.
Currently, there is no consensus among investors on the pace at which the ECB will lower borrowing costs until the end of the current year. Currently, the probability that the decision on the next easing of monetary policy will be made by the European financial regulator in October is estimated in the range of 30% to 50%.
It is worth noting that the refinancing rate was reduced by 60 basis points on Thursday. Currently, the corresponding indicator is at 3.65%. In this case, a technical adjustment has been expected for a long time. The gap between the two interest rates was set at 50 basis points in September 2019, when the ECB began implementing measures to stimulate the economy aimed at preventing the threat of deflation.
In March of the current year, the European financial regulator announced its intention to narrow the mentioned corridor to 15 basis points. The ECB considers the relevant decision as a measure to stimulate the eventual rekindling of lending between banks. The results of the meeting of officials of the financial institution, held on Thursday, testified to the implementation of the intention announced in March.
It is worth noting that the mentioned actions of the ECB in a certain sense are a preventive adjustment of its operating framework. Currently, banks in the eurozone have excess liquidity of 3 trillion euros which they deposit with the European financial regulator overnight, making the deposit rate in effect its main policy instrument.
It is expected that over time, the mentioned liquidity will decrease. Against this background, financial institutions will be forced to borrow from the ECB again at the refinancing rate, which is traditionally the central bank’s benchmark interest rate. After implementing the appropriate scenario, the main rate will regain its headline status.
The marginal lending rate, a rarely used instrument, was cut by 60 basis points on Thursday. Currently, the corresponding indicator is at 3.90%.
