ECB cuts key rates by 25 bps in December monetary policy decision, as expected

• Prior decision
• Deposit facility rate 3.00% vs 3.00% expected
• Prior 3.25%
• Main refinancing rate 3.15% vs 3.15% expected
• Prior 3.40%
• Marginal lending facility %
• Prior 3.65%
• Disinflation process is well on track
• Most measures of underlying inflation suggest that it will settle at around 2% target on a sustained basis
• Domestic inflation has edged down but remains high, mostly due to wages and prices in certain sectors
• Will discontinue reinvestments under PEPP at the end of 2024
• To follow a data-dependent, meeting-by-meeting approach to determining appropriate policy stance
• ECB is is not pre-committing to a particular rate path
• Decisions will be based on assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission
• Full statement

The decision is as per expected, so it isn’t really a surprise. However, the more dovish component is the lower projections on the economy as the ECB now sees the euro area economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026, and 1.3% in 2027. That compares to the September projections of 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026.

The lower inflation projections also support the narrative that they are still looking to cut rates going into next year. The ECB now sees core inflation averaging 2.9% in 2024, 2.3% in 2025, and 1.9% in both 2026 and 2027. That compares to the September projections of 2.9% in 2024, 2.3% in 2025, and 2.0% in 2026.

Besides that, the ECB has more or less acknowledged that rates are no longer in “sufficiently restrictive” territory. That as they removed this passage from the statement:

“It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.”

But considering their data-dependent approach, in which they have been preaching for some time already, it just means that as long as there is further softening in the economy then the ECB will carry on in cutting rates.

This article was written by Justin Low at www.forexlive.com.