At its September policy meeting, the European Central Bank (ECB) made the decision to ease the deposit lending facility by 25 basis points (bps), lowering it to 3.50% from the previous 3.75%. This move marks the second key interest rate reduction by the ECB this year, driven by recent economic data showing slowing growth across the Eurozone and a reduced inflation rate, now closer to the ECB’s 2.0% target, compared to 2.2% y/y in August.
Alongside the cut in the deposit facility rate, the ECB also adjusted other key rates, lowering the main refinancing operations rate by 60bps to 3.65% (previously 4.25%) and the marginal lending facility rate by 60bps to 3.90% (previously 4.50%). These adjustments maintain the 15bps spread between the deposit facility and the main refinancing rate, while preserving the 25bps spread between the main refinancing operations and the marginal lending facility.
The Governing Council of the ECB did not provide any forward guidance regarding future policy direction but emphasized its “data-dependent” approach. Decisions will be made on a meeting-by-meeting basis without pre-commitments, allowing the central bank to respond flexibly to evolving economic conditions.
Given the current environment, the ECB is expected to remain cautious, particularly as rising wages could apply upward pressure on inflation. Analysts predict that no additional rate cuts will occur at the ECB’s October meeting, but the possibility of another cut before the end of the year remains. A further reduction by December could be used to create a “soft landing” for the Eurozone economy as it navigates slower growth and stabilizing inflation.
