Main refinancing rate: The Board of Governors decided today to cut the deposit facility interest rate – the rate at which it directs the monetary policy stance – by 25 basis points. Based on the Board of Governors’ updated assessment of inflation expectations, core inflation dynamics and the strength of monetary policy transition, it is now appropriate to take another step in easing monetary policy constraint.
The latest inflation data has come as widely expected, and the latest ECB staff forecasts confirm previous inflation expectations. Employees expect headline inflation to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, as in the June forecast. Inflation is expected to rise again in the latter part of this year, in part because previous sharp declines in energy prices will come out of annual rates. Inflation is then expected to fall towards our target during the second half of next year. For core inflation, the forecast for 2024 and 2025 was revised slightly upwards, as inflation in services was higher than expected. Meanwhile, employees still expect a rapid decline in core inflation, from 2.9% this year to 2.3% in 2025 and 2.0% in 2026.
Domestic inflation remains high as wages continue to rise at a high pace. However, labor-cost pressures are moderate, and profits partially mitigate the impact of higher wages on inflation. Financing conditions remain constrained, and economic activity remains weak, reflecting weak consumption and private investment. Employees expect the economy to grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. This is a slight downward revision compared to June’s forecast, mainly due to a weaker contribution than domestic demand over the next few quarters.
The importance of the key refinancing rate in European monetary policy
The key refinancing rate in the Eurozone refers to the interest rate set by the European Central Bank for major refinancing operations. It is a key tool used by the ECB to implement monetary policy and influence economic conditions within the Eurozone. Here are some important points about the key refinancing rate in euros:
Main policy instrument: Along with the deposit facility rate and the marginal lending facility rate, the key refinancing rate forms part of the ECB’s key interest rates. Changes in these rates significantly affect borrowing costs for banks, businesses and consumers in the Eurozone.
Monetary Policy Transition: key refinancing rate plays a crucial role in the monetary policy transition. By adjusting this rate, the ECB can influence short-term interest rates in the broader economy, influencing lending and spending decisions by households and businesses.
Impact on financial markets: Fluctuations in the main refinancing rate can have significant implications for financial markets. Changes in this rate can lead to shifts in bond yields, stock prices, exchange rates and other financial instruments as market participants adjust their expectations based on policy decisions made by the ECB.
Future guidance: The ECB typically provides forward guidance on its future monetary policy intentions, including the expected trajectory of the key refinancing rate. Clear communication from the ECB regarding its policy stance can help guide market expectations. and influence the decision-making process by companies and investors.
Historical context: The main refinancing rate has varied over time based on prevailing economic conditions and the ECB’s assessment of the euro area economy.
In general, the main euro refinancing rate is a crucial tool used by the ECB to implement monetary policy, influence economic conditions and maintain price stability within the euro area. Changes in this rate can have far-reaching effects on the economy and financial markets
Factors affecting the determination of the main refinancing rate in euros
The key euro refinancing rate is a crucial tool used by the ECB to implement monetary policy, influence economic conditions and maintain price stability within the Eurozone. Changes in this price can have far-reaching effects on the economy and financial markets, making it a major focus of analysis by economists, investors and policymakers.
Changes in the key refinancing rate, set by the ECB, are influenced by a variety of factors that reflect the ECB’s mandate to maintain price stability and support economic growth within the eurozone. Here are some of the key factors that can influence decisions regarding the main refinancing rate:
Economic growth:
GDP growth: The ECB takes into account economic growth indicators, such as GDP growth rates, employment trends, and business sentiment, when determining interest rates. Strong economic growth may ensure higher interest rates to prevent prices from rising, while weak growth may lower interest rates to stimulate activity.
Exchange Rates:
Euro Exchange Rate: Fluctuations in the value of the euro against other major currencies can affect export competitiveness, inflation dynamics, and general economic conditions within the Eurozone. The ECB may adjust interest rates in response to exchange-rate movements.
Global Economic Conditions:
International developments: Global economic trends, trade dynamics, geopolitical events and financial market conditions can also influence the ECB’s policy decisions.
Market Expectations:
Future guidance: The ECB’s communication with markets and the public about its future political intentions can influence market expectations and influence interest rate decisions. Clarity and consistency in communication are important to guide market participants.
These factors interact in complex ways to shape the ECB’s decisions on the key refinancing rate. The ECB Governing Council assesses a wide range of economic and financial indicators to determine the appropriate monetary policy stance at any given time.
