The European Central Bank (ECB) announced a 25 basis point reduction across its three key interest rates following its December 2024 policy meeting. This decision reflects the ECB’s updated assessment of the inflation outlook, underlying inflation dynamics, and the effectiveness of monetary policy transmission. This move signals a continued effort to manage disinflation and support economic recovery within the Eurozone.
Table Content:
Disinflation and Underlying Inflation Trends
The ECB confirms that the disinflation process is progressing as anticipated. Staff projections indicate headline inflation averaging 2.4% in 2024, gradually declining to 1.9% in 2026 before rising slightly to 2.1% in 2027 upon implementation of the expanded EU Emissions Trading System. Core inflation, excluding energy and food, is projected to average 2.9% in 2024, steadily decreasing to 1.9% in both 2026 and 2027. These figures suggest a convergence towards the Governing Council’s medium-term target of 2% inflation. While domestic inflation is moderating, it remains elevated due to delayed adjustments in wages and prices across specific sectors.
Economic Outlook and Monetary Policy Transmission
Easing financing conditions, resulting from recent interest rate cuts, are gradually reducing borrowing costs for businesses and households. However, the overall monetary policy stance remains restrictive due to the lagged impact of past rate hikes on outstanding credit. The ECB staff now anticipates a slower economic recovery compared to September’s projections, with growth estimated at 0.7% in 2024, gradually increasing to 1.4% in 2026. This recovery is primarily driven by rising real incomes, fostering increased household consumption and business investment. The fading effects of restrictive monetary policy are expected to further stimulate domestic demand over time.
Interest Rate Adjustments and Asset Purchase Programs
The deposit facility rate, a key instrument for steering monetary policy, has been lowered to 3.00%. The interest rates on the main refinancing operations and the marginal lending facility have been adjusted to 3.15% and 3.40%, respectively, effective December 18, 2024. The ECB continues its measured reduction of the Asset Purchase Programme (APP) portfolio by not reinvesting principal payments from maturing securities. Similarly, the Pandemic Emergency Purchase Programme (PEPP) portfolio is being reduced by €7.5 billion per month on average, with reinvestments ceasing at the end of 2024. The repayment of targeted longer-term refinancing operations this month marks the conclusion of a significant phase in the balance sheet normalization process.
Commitment to Price Stability and Policy Flexibility
The Governing Council reaffirms its commitment to maintaining price stability at its 2% medium-term target. The ECB will adopt a data-driven, meeting-by-meeting approach to determine future monetary policy adjustments, emphasizing the assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission. The Transmission Protection Instrument (TPI) remains available to address unwarranted market disruptions that threaten monetary policy transmission across the Euro area. The ECB emphasizes its readiness to adjust all available instruments to ensure sustainable inflation and maintain the smooth functioning of monetary policy transmission.
Conclusion
The ECB’s decision to lower key interest rates underscores its proactive approach to managing disinflation and supporting economic recovery within the Eurozone. By closely monitoring economic data and maintaining policy flexibility, the ECB aims to ensure price stability and foster sustainable economic growth. The central bank’s commitment to its mandate and its data-dependent approach will be crucial in navigating the evolving economic landscape.
