On Thursday 12 December the European Central Bank (ECB) cut all three key interest rates by 25 basis points for the fourth time this year.
The new deposit facility rate fell to 3%, the marginal lending facility rate to 3.4% and the benchmark refinancing rate to 3.15%. Incidentally, the ECB's decision was in line with analysts' and market participants' expectations.
Most core inflation data suggest that inflation is stabilising at the ECB's aim of 2% over the medium term on a sustainable basis,' the regulator said.
The ECB's Governing Council remains committed to bringing inflation down to the medium-term objective, although the phrase that the central bank's leadership will keep key interest rates at a fairly restrictive level for as long as it takes to achieve this objective has disappeared from the press release. The regulator forecasts that consumer prices in the euro area will rise by 2.1% in 2025 and 1.9% in 2026.
Financial conditions are gradually easing as a result of the recent decline in interest rates. This is leading to lower borrowing costs for businesses and households. However, conditions remain tight because monetary policy remains restrictive and because of the impact of past interest rate increases on previously granted credit,' the press release said.
The regulator confirmed its intention to reduce its portfolio of securities purchased under the Pandemic Emergency Purchase Programme (PEPP) by an average of €7.5 billion per month. The ECB plans to stop reinvesting PEPP proceeds at the end of 2024. Meanwhile, the portfolio of securities purchased under the Asset Purchase Programme (APP) is shrinking at a moderate and predictable pace as the regulator stops reinvesting the proceeds of redeemable securities.
As a reminder, the European Central Bank has been steadily tightening monetary policy since July 2022 to combat accelerating inflation, which jumped above 10% in October 2022.
Until then, the deposit rate was negative (-0.5%), the base rate was 0% and the marginal lending rate was 0.25%.
The regulator raised interest rates consistently at ten consecutive meetings. By September 2023, the policy rate had risen to 4.5%, the marginal lending rate to 4.75% and the deposit rate to 4%. Since then, the ECB has kept rates at the same level for a long time. It was only at the beginning of 2024 that the ECB started to lower them.