European Central Bank Cuts Key Interest Rates As Inflation Cools

On Thursday, the European Central Bank (ECB) lowered interest rates by 25 basis points, a largely anticipated move.

"Based on the Governing Council's updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction," the bank writes.

The new interest rates are set at 3.50% for the deposit facility, compared to 3.75% last month, the refinancing rate at 3.65%, down from 4.25%, and the marginal lending rate at 3.90%, down from 4.5%.

These rates were previously cut by 25 basis points during the June meeting.

Recent inflation data have largely met expectations, with the latest ECB staff projections aligning with previous forecasts. Headline inflation is anticipated to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, consistent with June's projections.

Inflation is projected to rise again later this year, partly due to the fading impact of sharp energy price declines. However, it should trend downward toward the ECB's target in the second half of 2024.

Core inflation projections for 2024 and 2025 have been slightly revised upward due to stronger-than-expected services inflation.

Nonetheless, a swift decline in core inflation is still expected, falling from 2.9% this year to 2.3% in 2025 and 2.0% in 2026.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.

The ECB staff forecasts the economy to grow by 0.8% in 2024, with an increase to 1.3% in 2025 and 1.5% in 2026. These figures represent a slight downward adjustment from the June estimates, primarily due to weaker domestic demand expected in the coming quarters.

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