The Eurozone main refinancing rate index, often referred to as the “mortgage refinancing rate” or “refinancing rate”, is a key interest rate set by the European Central Bank (ECB). This rate is used in the European system’s major refinancing operations (MROs), which are regular auctions where banks can borrow money from the European Central Bank. The refinancing rate is critical because it affects the cost of borrowing for banks.
Here are some key points about the Prime Refinancing Rate Index:
1. Purpose: The refinancing rate is used to manage liquidity in the banking system, control inflation, and stabilize the economy. By adjusting this rate, the European Central Bank can influence the amount of money in circulation.
2. Rate setting: The rate is set by the European Central Bank’s Governing Council, which meets regularly to review economic and financial conditions. Price decisions are based on various economic indicators and forecasts.
3. Impact on the economy: Changes in the refinancing rate can have wide-ranging impacts. Lowering the rate can stimulate economic growth by making borrowing cheaper and encouraging spending and investment. Conversely, raising the interest rate can help cool the economy and control inflation by making borrowing more expensive.
4. Relationship to other rates: The refinancing rate is part of the ECB’s triad of key interest rates, including the deposit rate (the interest paid on deposits held at the ECB) and the marginal lending rate (the rate at which banks can borrow overnight from the European Central Bank). Together, these rates form the basis of the European Central Bank’s monetary policy.
5. Historical Context: The refinancing rate has varied over time in response to economic conditions. For example, during periods of financial crisis or economic downturn, the European Central Bank often cuts interest rates to support growth.
ECB April 2024 statement and prospects for interest rate cuts
On April 11, 2024, the European Central Bank held interest rates for the fifth meeting in a row, providing the clearest signal yet of a possible rate cut, despite uncertainty surrounding the US Federal Reserve’s next steps. The ECB statement stressed that if the Governing Council’s updated assessment of inflation expectations, underlying inflation trends, and the effectiveness of monetary policy transmission strengthens their confidence in achieving the inflation target sustainably, a reduction in current monetary policy restrictions will be justified.
During the subsequent press conference, ECB President Christine Lagarde stressed that this new statement is a “loud and clear signal” of the bank’s current expectations. This represents a departure from previous communications, where the ECB did not explicitly discuss easing monetary policy.
Earlier, the European Central Bank, which oversees monetary policy for the 20 countries that use the euro, raised its key interest rate to a record high of 4% in September. This rate has remained unchanged at all meetings since then.
Policymakers and economists are looking to this month as a potential starting point for interest rate cuts, after the European Central Bank reviewed its medium-term inflation forecasts. It is worth noting that inflation rates in the euro area slowed more than expected in March.
June will also mark the first time that policymakers receive comprehensive data on first-quarter wage negotiations, a crucial factor in assessing potential inflationary impacts.
On April 11, 2024, the European Central Bank announced that the latest information “broadly confirmed” its medium-term expectations, with lower inflation driven by lower food and commodity prices.
The European Central Bank has signaled a possible June rate cut for some time now, setting a high threshold for any deviation from this plan. However, results in subsequent months will vary depending on continued progress in the fight against inflation.
ECB implements interest rate cutting strategy: June 2024 update
The Governing Council decided to cut the European Central Bank’s three key interest rates by 25 basis points, marking a shift in monetary policy after nine months of fixed interest rates. This decision comes after a comprehensive assessment of inflation expectations, core inflation dynamics, and the effectiveness of monetary policy transmission. Since the September 2023 meeting, inflation has fallen by more than 2.5 percentage points, and inflation expectations have improved significantly. Core inflation also fell, indicating weak price pressures and lower inflation expectations at all levels. Tight financing conditions, resulting from previous monetary policy, have effectively weakened demand and stabilized inflation expectations, helping to reduce inflation.
The Board of Governors remains committed to ensuring that inflation returns to its medium-term target of 2% immediately. To achieve this, interest rates will be maintained at restricted levels for as long as necessary. The Council will continue to adopt a data-driven, meeting-by-meeting approach to determine the appropriate level and duration of these measures. Future interest rate decisions will depend on a comprehensive analysis of inflation expectations, incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Council emphasizes its flexibility and refraining from committing to the pre-determined interest rate path.
The Governing Council announced a decline in Eurosystem holdings of securities under the Pandemic Emergency Purchase Program (PEPP) by an average of EUR 7.5 billion per month during the second half of the year.
In addition, the European Central Bank decided to cut its three key interest rates by 25 basis points. Effective June 12, 2024, the interest rate on the principal refinancing operations will be 4.25%, while the interest rate on the Marginal Lending Facility and Deposit Facility will be 4.50% and 3.75%, respectively.
