Europe: Continue to implement cautious monetary policy to achieve inflation targets
2024-09-16
■ The European Central Bank (ECB) has decided to cut deposit rates by another 0.25% after June
■ The current policy stance will remain unchanged temporarily, but if the economic and price prospects face risks, the adjustment speed will accelerate
The European Central Bank (ECB) decided at its board meeting on the 12th to lower the limit of its policy interest rate target, the Central Bank Deposit Rate (DFR), by 0.25%. At the same time, according to the adjustment of the monetary policy framework released on March 13th, the lower auction limit interest rate for the primary refinancing operations (MROs) rate, which is the primary tool for monetary adjustment, and the upper target limit of the policy interest rate, the marginal loan facility (MLF) rate, have been lowered by 0.60%. Therefore, the target range (corridor) of policy interest rates has narrowed from 3.75% -4.50% to 3.50% -3.90%. This corridor correction is a technical measure aimed at the downward expansion of MROs interest rates due to the harmful interest rate application of DFR. This time, the significant reduction in MROs and MLF interest rates does not mean a rapid easing of monetary policy but rather progress in the normalization of economic policy.
The guidance on future policies in the statement remains unchanged, and the appropriate level and duration of monetary tightening will continue to be determined based on data from each meeting. The policy interest rate will be determined based on future economic and financial data, core inflation trends, and the strength of monetary policy transmission, combined with the outlook for prices. European Central Bank Governor Lagarde only stated at a press conference after the board meeting that she would continue to cut interest rates without clearly stating the specific path of policy interest rates.
The newly released macroeconomic forecast for staff shows that the GDP growth rate for 2024-2026 has been lowered compared to the forecast in June, while the increase in the Consumer Price Index (HICPX), excluding energy and food for 2024 and 2025, has been raised. The expected increase in the Consumer Price Index (HICP), an inflation target indicator, remains consistent with June. Inflation is expected to accelerate in the fourth quarter of 2024 due to the base effect of energy prices and then return to the 2% inflation target by the end of 2025.
Due to the high service prices and the expected wage growth rate sensitive to service prices, likely to continue until the second half of 2024, the ECB Council did not imply that it will reconsider its cautious policy decisions soon. The current policy stance may be maintained for a while until wage pressure increases and core inflation slows down significantly. However, the momentum of recent economic expansion has once again weakened. From the perspective of "monetary policy transmission," if the demand suppression effect exceeds the ECB's expectations, leading to a risk to the consumer-led economic recovery and price prospects, it may accelerate the speed of policy adjustment, including significant interest rate cuts or consecutive interest rate cuts.
■ The current policy stance will remain unchanged temporarily, but if the economic and price prospects face risks, the adjustment speed will accelerate
The European Central Bank (ECB) decided at its board meeting on the 12th to lower the limit of its policy interest rate target, the Central Bank Deposit Rate (DFR), by 0.25%. At the same time, according to the adjustment of the monetary policy framework released on March 13th, the lower auction limit interest rate for the primary refinancing operations (MROs) rate, which is the primary tool for monetary adjustment, and the upper target limit of the policy interest rate, the marginal loan facility (MLF) rate, have been lowered by 0.60%. Therefore, the target range (corridor) of policy interest rates has narrowed from 3.75% -4.50% to 3.50% -3.90%. This corridor correction is a technical measure aimed at the downward expansion of MROs interest rates due to the harmful interest rate application of DFR. This time, the significant reduction in MROs and MLF interest rates does not mean a rapid easing of monetary policy but rather progress in the normalization of economic policy.
The guidance on future policies in the statement remains unchanged, and the appropriate level and duration of monetary tightening will continue to be determined based on data from each meeting. The policy interest rate will be determined based on future economic and financial data, core inflation trends, and the strength of monetary policy transmission, combined with the outlook for prices. European Central Bank Governor Lagarde only stated at a press conference after the board meeting that she would continue to cut interest rates without clearly stating the specific path of policy interest rates.
The newly released macroeconomic forecast for staff shows that the GDP growth rate for 2024-2026 has been lowered compared to the forecast in June, while the increase in the Consumer Price Index (HICPX), excluding energy and food for 2024 and 2025, has been raised. The expected increase in the Consumer Price Index (HICP), an inflation target indicator, remains consistent with June. Inflation is expected to accelerate in the fourth quarter of 2024 due to the base effect of energy prices and then return to the 2% inflation target by the end of 2025.
Due to the high service prices and the expected wage growth rate sensitive to service prices, likely to continue until the second half of 2024, the ECB Council did not imply that it will reconsider its cautious policy decisions soon. The current policy stance may be maintained for a while until wage pressure increases and core inflation slows down significantly. However, the momentum of recent economic expansion has once again weakened. From the perspective of "monetary policy transmission," if the demand suppression effect exceeds the ECB's expectations, leading to a risk to the consumer-led economic recovery and price prospects, it may accelerate the speed of policy adjustment, including significant interest rate cuts or consecutive interest rate cuts.