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On Thursday, the European Central Bank reduced its rates from 3.75% to 3.50%, citing easing inflation and economic conditions as reasons for slightly easing its policy stance. This marks the second rate cut in three months, signalling a gradual normalization after last year’s aggressive rate hikes in response to the highest inflation levels in decades. 

(ECB Interest Rate Decision, Source: Investing.com) 

According to the ECB, based on the Governing Council’s updated evaluation of inflation, underlying inflation trends, and the effectiveness of monetary policy, another step toward easing restrictions is now appropriate. The central bank did not indicate further rate cuts for October but acknowledged that domestic inflation remains elevated. However, it highlighted that pressures from labour costs are easing, and profits are partly offsetting the impact of higher wages on inflation. 

Additionally, the rate at which banks can borrow from the ECB through weekly auctions was reduced more significantly from 4.25% to 3.65%, following an earlier decision to lessen penalties for using this facility. The rate for daily cash auctions was also reduced, falling from 4.50% to 3.90%. Money markets are anticipating several more cuts of similar magnitude, potentially leaving the deposit rate at 2.0% to 2.25% by June 2025. 

(ECB Deposit Facility Rate, Source: Investing.com)

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