ECB set to cut key interest rate by 0.25% in upcoming meeting

The European Central Bank (ECB) is expected to reduce its key interest rate by 0.25% on Thursday, according to most economists in Greece and the Eurozone. The ECB is also anticipated to make a larger cut to its main refinancing rate and marginal lending rate to address the significant disparities between these rates.

Currently, the deposit facility rate is 3.75%, the main refinancing rate is 4.25%, and the marginal lending rate is 4.5%. The ECB aims to narrow the difference between the deposit and main refinancing rates from 0.5% to 0.15%. If market expectations hold, the deposit rate will decrease to 3.5%, the main refinancing rate to 3.65%, and the marginal lending rate to 3.9%. This adjustment could benefit borrowers in more competitive banking environments by potentially lowering borrowing costs.

ECB officials note that this technical adjustment is necessary as the bank phases out quantitative easing measures, which included bond purchases and reinvestments. Banks are expected to rely more on traditional liquidity sources, including the ECB's refinancing operations at lower rates.

Despite a slight increase in inflation in July and moderate economic growth, there is speculation that the ECB may implement two additional rate cuts this year. The annual inflation rate for the EU was 2.8% in July, up from 2.6% in June and down from 6.1% a year earlier. Services contributed the most to inflation, followed by food, non-energy industrial goods, and energy.

The Eurozone economy continued to grow at a slow pace in the second quarter of 2024, with GDP increasing by 0.3% in both the Eurozone and the EU, following a similar increase in the first quarter. Year-on-year, GDP rose by 0.6% in the Eurozone and 0.8% in the EU.

[Information sourced from CNA]