The decision to cut the deposit facility rate - the rate through which the Governing Council steers the monetary policy stance - was based mainly on its updated assessment of the inflation outlook, the dynamics of core inflation and the strength of monetary policy transmission.
The process of disinflation is well under way. According to the Governors' view, headline inflation will average 2.4 % in 2024, 2.1 % in 2025, 1.9 % in 2026 and 2.1 1 % in 2027, when the EU's extended emissions trading scheme starts. For inflation excluding energy and food, staff projects an average of 2.9 % in 2024, 2.3 % in 2025, and 1.9 % in 2026 and 2027.
Most measures of core inflation suggest that inflation will stabilise permanently around the Governing Council's medium-term objective of 2 %. Domestic inflation has declined but remains high, mainly because wages and prices in some sectors are still adjusting to the past surge in inflation with a considerable lag.
Funding conditions are easing as the recent interest rate cuts by the Governing Council are gradually making new loans to firms and households cheaper. However, they remain tight as monetary policy remains restrictive and past interest rate increases are still reflected in the volume of outstanding loans.
The governors now expect a slower economic recovery than in the September projections. Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter. Staff projects the economy to grow by 0.7 % in 2024, 1.1 % in 2025, 1.4 % in 2026, and 1.3 % in 2027. The projected recovery relies mainly on rising real incomes - which should allow households to consume more - and on increasing investment by firms. The gradually diminishing effects of restrictive monetary policy should support a recovery in domestic demand over time.
The Governing Council is committed to ensuring a sustainable stabilisation of inflation at its medium-term objective of 2 %. It will take a data-driven, meeting-by-meeting approach in determining the appropriate monetary policy stance. In particular, the Governing Council's interest rate decisions will be based on an assessment of the inflation outlook in the light of incoming economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission. The Governing Council does not commit itself in advance to a particular interest rate path.
Key ECB interest rates
The Governing Council decided today to cut the ECB's three key interest rates by 25 basis points. The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will therefore be reduced to 3.00 %, 3.15 % and 3.40 % respectively with effect from 18 December 2024.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP portfolio is declining at a measurable and predictable pace because the Eurosystem no longer invests principal repayments on maturing securities.
The Eurosystem no longer invests all principal repayments on maturing securities purchased under the PEPP, reducing the PEPP portfolio by an average of EUR 7.5 billion per month. The Governing Council will end the reinvestment in the PEPP at the end of 2024.
Refinancing operations
This month, banks will repay the remaining amounts borrowed under the targeted longer-term refinancing operations, thus completing this part of the balance sheet normalisation process.
The Governing Council stands ready to adjust all its instruments within its mandate to ensure a sustainable stabilisation of inflation at the 2% target over the medium term and to maintain the smooth functioning of monetary policy transmission. In addition, a transmission protection tool is available to counteract unwarranted disorderly market dynamics that seriously undermine monetary policy transmission in all euro area countries, thus enabling the Governing Council to fulfil its price stability mandate more effectively.
ECB/ gnews - RoZ
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