The European Central Bank has cut rates for the second time in three months amid weak economic conditions, calling on governments to take up the Draghi report’s proposals to strengthen the European economy.
The deposit rate, which is a benchmark because banks still have abundant liquidity provided by the ECB during the crisis years, was cut by 25 basis points to 3.50%.
The ECB will thus influence the conditions under which banks lend to each other, offering a breath of fresh air to ease tensions on household mortgage credit and business loans.
The decline in inflation, to 2.2% in August in the eurozone, argued in favour of a new easing, after that of June, as did the sluggishness of economic activity in Europe.
Although today’s decision was taken unanimously by the twenty-five members of the Board of Governors, due to its “timely” nature, according to the press release of their decision, the situation remains unclear regarding the continuation of the easing.
“We will decide meeting by meeting and our trajectory, the direction of which is quite obvious, is not predetermined, neither in terms of sequence nor in terms of volume,” the president of the institution Christine Lagarde repeated to the press.
In other words, the position of the “hawks” within the ECB remains preponderant, they who campaign for a cautious and progressive approach on rates, to avoid a return of inflation.
This policy of small steps is the subject of criticism among those who believe that the ECB is acting too late and too slowly, harming the economy. The next rate cut is expected in December.
Monetary policy “remains unnecessarily and for too long in a restrictive zone. This is not good news for the eurozone, whose growth dynamics currently only have one direction – downward,” comments Eckhard Schulte, analyst at MainSky Asset Management.
After a phase of unprecedented credit increases to combat exceptionally high inflation, particularly following the Russian war in Ukraine, the guardians of the euro lowered rates in June for the first time in five years.
Draghi Report
The ECB had paused in July but the economic context has pushed it back into action: inflation has fallen below the 2% target in the two largest economies, France and Germany, while wage increases are starting to slow.
In addition, economic growth in the euro area has been revised slightly downwards, to 0.2% for the second quarter of 2024.
The new economic projections published by the ECB on Thursday do not help in the decision: slight downward adjustment of growth, maintenance of inflation expectations seeing the indicator reach the target of 2% at the end of 2025.
In this unfavourable context, the diagnosis made this week on the European economy by Mario Draghi’s report is “harsh but fair”, said Mr.me Lagarde, and should, according to her, lead governments to take up the proposals made in this document.
In particular, to launch “now” reforms with a view to reducing their budget deficits, without the former Minister of the Economy citing France in particular, where the subject constitutes one of the priorities of Prime Minister Michel Barnier.
Since the end of July, France has been the target of a European procedure for excessive deficit, like six other EU member states.
Technical details of today’s decisions: the spread between the deposit rate and the one-week bank refinancing rate was reduced from 50 to 15 basis points.
The aim of the change, announced in March, is to avoid volatility in rates on the interbank market when the ECB has reduced excess liquidity in the banking sector, a process that is expected to take years but which the institute wants to anticipate.
The rate on refinancing operations (MRO), which banks pay if they have to borrow money from the ECB for a week, has thus fallen to 3.65%, and that on overnight allocations (MLF) to 3.90%.