European Central Bank Unveils Interest Rate Decision
The European Central Bank (ECB) Governing Council has reduced the three key interest rates by 25 basis points, as expected. Accordingly, from December 18, 2024, the interest rates for the deposit facility, main refinancing operations, and marginal lending facility will be set at 3.00%, 3.15%, and 3.40%, respectively.
With today’s decision, the ECB Governing Council has implemented a 25 basis point reduction in the three main interest rates. This decision was made in light of updated inflation expectations, core inflation dynamics, and an assessment of the impacts of monetary policy, particularly on the deposit facility interest rate, which plays a crucial role in managing monetary policy.
Inflation Outlook Improves According to the ECB's current forecasts, the disinflation process continues to progress. The bank anticipates that headline inflation will average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026, and 2.1% in 2027. There is an expectation of a slight increase in inflation rates with the implementation of an expanded EU Emission Trading System in 2027.
Inflation projections excluding energy and food have been set at 2.9% for 2024, 2.3% for 2025, and 1.9% for 2026-2027. Various core inflation measures indicate that price increases will remain aligned with the ECB’s medium-term goal of 2%.
Economic Recovery Expectations Weaken The ECB has stated that the economic recovery is progressing slower than expected. The growth forecast for 2024 has been revised to 0.7%, 1.1% for 2025, 1.4% for 2026, and 1.3% for 2027.
According to the ECB, the recovery will primarily rely on increased real incomes for households and consequent consumption growth. Additionally, corporate investments are expected to support the recovery. The diminishing tightening effects of monetary policy are anticipated to play a role in supporting the recovery of domestic demand in the medium term.
Financing Conditions Relax With the recent interest rate cuts, the new borrowing costs for companies and households are decreasing. However, it is noted that financing conditions remain generally tight, and the impacts of past interest rate hikes are still felt in the current credit stock.
The ECB focuses on ensuring the effective transmission of monetary policies to support domestic demand and investment. In this context, measures will be taken against unexpected and disruptive movements in the market.
APP and PEPP Portfolios Being Reduced The ECB continues its policy of not reinvesting the principal payments received from securities under the Asset Purchase Program (APP). Consequently, the portfolio is being reduced in a controlled and predictable manner.
Under the Pandemic Emergency Purchase Program (PEPP), the portfolio is being reduced by an average of €7.5 billion per month. It has been decided that all principal payments made under PEPP will not be reinvested, and this practice is expected to conclude by the end of 2024.
ECB Maintains Flexibility The Governing Council has stated that it is ready to adjust all tools within its authority to ensure that inflation stabilizes steadily at the 2% target. It was also emphasized that the activation of the Tools for Protecting the Monetary Policy Transition could be employed to counteract disruptive market movements.