The European Central Bank (ECB) has cut interest rates for the first time in five years, marking a loosening of austerity policies, but emphasized that it has not pre-committed to any specific interest rate path.

The ECB, as expected, reduced interest rates by 25 basis points, stating that it has not pre-committed to a specific interest rate path, while also anticipating that inflation may remain above target for a significant period of time next year.

Full Text of the ECB's Policy Statement

The Governing Council of the ECB has decided today to lower the three main interest rates by 25 basis points. Based on the latest assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission, it is now appropriate to ease the degree of monetary policy restriction after maintaining interest rates unchanged for nine months. Since the September 2023 Governing Council meeting, inflation has fallen by more than 2.5 percentage points, and the inflation outlook has significantly improved. Underlying inflation has also eased, reinforcing signs of waning price pressures and a comprehensive decline in inflation expectations. Monetary policy has restricted financing conditions and made a significant contribution to the decline in inflation by curbing demand and stabilizing inflation expectations.

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At the same time, despite progress in recent quarters, domestic price pressures remain strong due to accelerating wage growth, and inflation may remain above target for a significant period of time next year. Compared to the March forecast, the latest projections by the Eurosystem staff for the overall inflation rate and core inflation rate for 2024 and 2025 have both been revised upwards.

The staff currently expects the overall inflation rate to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026; for core inflation, excluding energy and food, the staff expects an average of 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026; economic growth is expected to rebound to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.

The Governing Council is determined to ensure that inflation returns to the 2% medium-term target in a timely manner. To achieve this goal, the Governing Council will maintain sufficient policy rate restrictions for as long as necessary. The Governing Council will continue to follow a data-based and meeting-by-meeting approach to determine the appropriate level of restriction and duration. In particular, interest rate decisions will be made based on the assessment of the inflation outlook and based on upcoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Governing Council has not pre-committed to a specific interest rate path.

The Governing Council also confirmed today that it will reduce the average monthly amount of securities held by the Eurosystem under the Pandemic Emergency Purchase Programme (PEPP) by €7.5 billion in the second half of this year. The method of reducing PEPP holdings will be roughly consistent with the approach followed under the Asset Purchase Programme (APP).

ECB Main Interest Rates

The Governing Council decided to lower the ECB's three key interest rates by 25 basis points. Consequently, from June 12, 2024, the main refinancing operations rate, the marginal lending facility rate, and the deposit facility rate will be reduced to 4.25%, 4.50%, and 3.75%, respectively.Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)

Due to the Eurosystem no longer reinvesting the principal of maturing securities, the APP portfolio is decreasing at a measurable and predictable pace.

The Governing Council will continue to fully reinvest the principal of maturing securities purchased under the PEPP until the end of June 2024. In the second half of the year, the PEPP portfolio will decrease by an average of €7.5 billion per month. The Governing Council intends to cease reinvestments under the PEPP at the end of 2024.

The Governing Council will continue to flexibly reinvest the redemptions of the PEPP portfolio maturing to address risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing Operations

As banks repay the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess the impact of the targeted lending operations and their continuous repayments on its monetary policy stance.

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target in the medium term and to maintain the smooth transmission of monetary policy. Additionally, the transmission protection instrument can be used to address unwarranted, disorderly market dynamics that pose a serious threat to the monetary policy transmission in all euro area countries, thereby allowing the Council to more effectively fulfill its price stability mandate.