The European Central Bank (ECB) decided on Thursday to cut its key interest rates by a quarter of a percentage point, marking a fourth reduction in official borrowing costs since June as inflation continues to cool.
ECB president Christine Lagarde also opened the door for further cuts next year as she dropped a previous reference following recent governing council meetings about needing to “keep policy rates sufficiently restrictive for as long as necessary”.
The latest round of cuts sees the deposit rate – the ECB’s main rate – fall to 3 per cent. The ECB’s rates-setting council has also reduced its main lending rate, off of which tracker mortgages are priced, at the same pace, to 3.15 per cent.
“The disinflation process is well on track,” Ms Lagarde told reporters at a press briefing, noting that the ECB’s own economists now see headline inflation across the euro zone averaging 2.4 per cent in 2024 and 2.1 per cent in 2025, both marginally below what they had forecast in September. They see inflation of 1.9 per cent in 2026.
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“Most measures of underlying inflation suggest that inflation will settle at around the governing council’s 2 per cent medium-term target on a sustained basis,” she said.
Euro zone inflation climbed to an annual rate of 2.3 per cent in November from 2 per cent the previous month, while services prices remained particularly elevated, at 3.9 per cent, according to figures published by Eurostat, the EU’s statistics agency, at the end of last month. Inflation across the single-currency region had peaked at 10.6 per cent in October 2022.
The still-elevated level of services inflation led to a number of ECB governing council members, including Central Bank of Ireland governor Gabriel Makhlouf, to caution in recent weeks against the organisation going for a larger, 0.5 of a percentage point cut to rates on Thursday.
Ms Lagarde said that there had been some discussion about a 0.5 of a point cut during the latest meeting but that members of the governing council ultimately “rallied towards” a quarter-point reduction.
ECB staff also lowered their economic growth forecasts for the euro zone marginally, and now see gross domestic product (GDP) rising 0.7 per cent this year, followed by 1.1 per cent and 1.4 per cent expansion in 2025 and 2026, respectively.
Donald Trump’s threats that he will introduce fresh trade tariffs on imported goods when he becomes US president again in January pose a risk to growth and inflation internationally, according to economists.
“I continue think that restrictions on trade, protectionist measures, are not conducive to growth and ultimately have an impact on inflation that is largely uncertain,” said Ms Lagarde.
For a typical tracker mortgage holder, an ECB rate cut of 0.25 per cent sees their monthly repayments fall by €13 for every €100,000 owed. That is just under €40 a month for those with a €300,000 loan.
Rates have fallen by 1.35 percentage points in 2024, which translates into a monthly repayment reduction of €74 for every €100,000 owed over a 20-year term or €222 for someone with a €300,000 mortgage which is €2,664 a year.
While the ECB moves will put pressure on Irish banks to cut fixed and variable rates, centralised rate cuts or increases do not always transfer directly on to the Irish market. In 2022 and 2023 the ECB increased rates by 4.5 per cent but Irish banks only increased rates by about 1.5 per cent. Many of them will have priced the latest rate cuts into their existing rates.
Financial markets are currently pricing in the ECB deposit rate falling to 1.75 per cent by the end of next year.
Davy investment strategist Stephen Grissing described the overall tone from the ECB on Thursday as “dovish”, which indicates a bias towards continuing to cut rates.
“Few reasons exist that would cause the governing council to pause its rate-cutting cycle at this point,” he said. “November data highlighted a slowdown in business activity, and Germany, the euro zone’s largest economy, continues to face challenges.”
Deutsche Bank’s chief European economist, Mark Wall, said that the ECB’s statements on Thursday “fell like an endorsement” for financial markets betting that the deposit rate will be lower than what is considered a “neutral rate” by the end of next year. A rate of about 2 per cent is widely seen as a neutral rate for the ECB.
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