Ultimately the bearish option passed. The governing council of the ECB decided to cut interest rates again by 0.25%, bringing the deposit rate to 3%. The president at the press conference Christine Lagarde he indicated that, during the meeting, there was also talk of the possibility of having a more courageous decision by deciding on a 0.5% cut. In the end, however, the line of prudence passed because “there is no victory yet on inflation, it is not yet ‘mission accomplished’ but we are certainly on the right path to achieving the objective”.
Today’s cut was the fourth since June and reflects the favorable trend in inflation in the Eurozone.
The board of directors of ECB justified the decision with an updated assessment of the inflation outlook and monetary policy transmission, underlining that the disinflation process is now “well underway”. There was a peak of liveliness in November but, he kept saying the Lagarde at the press conference, “it was expected”.
Forecasts indicate an average inflation of 2.4% in 2024, decreasing to 2.1% in 2025 and 1.9% in 2026 and 2027. Excluding the energy and food components, core inflation will be around 2.9% in 2024 and 2.3% in 2025.
Despite these positive signs, the ECB it also revised its economic growth estimates downwards. According to the new forecast, GDP will grow by just 0.7% in 2024, compared to the 1.1% forecast in September. Projections for 2025 and 2026 are set at 1.1% and 1.4%, respectively. The board of directors he explained that the economic recovery will be slower than expected, with signs of contraction in the fourth quarter of this year.
At the press conference, the president Christine Lagarde he clarified that the ECB does not expect a 50 basis point rate cut next January. “We will continue to decide based on the data, without a pre-established path,” he stressed Lagardeadding that monetary policy will still remain restrictive. The president also declared that projections for the medium term indicate convergence towards the inflation objective of 2% for 2025. This is also why rates are falling. The next cuts will take them below the “short-term neutrality” which is around 2%.
Responding to a question, he explained that despite France’s difficulties, there was no discussion about the anti-spread shield adopted by it ECB in 2022 to ensure uniform transmission of monetary policy impulses across Member States. Conversely, the debt defense plan which allowed reinvestments of maturing debt targeted at individual countries will be cancelled. “The Pepp it proved to be an exceptional tool for exceptional times, to deal with the pandemic when we were dealing with it.” Lagarde he added that the ECB he has not used PEPP flexible reinvestments for over a year: “they have not been used since July 2023”.
