The governing council of the European Central Bank (ECB) decided to lower its three key interest rates by 25 basis points last Friday (April 18) based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.25 per cent, 2.40 per cent and 2.65 per cent respectively with effect from April 23.

In arriving at its decision, the ECB reports “the disinflation process is well on track”, noting, “inflation has continued to develop as staff expected, with both headline and core inflation declining in March”. Services inflation has also eased markedly over recent months. 

Wage growth moderating 

Most measures of underlying inflation suggest that inflation will settle at around the ECB Governing Council’s two per cent medium-term target on a sustained basis. The central bank observes wage growth is moderating, and profits are partially buffering the impact of still elevated wage growth on inflation. 

In addition, the Euro Area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions. Also, increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions. 

These factors, the ECB says, may further weigh on the economic outlook for the Euro Area. The governing council says it is determined to ensure that inflation stabilises sustainably at its two per cent medium-term target. 

Appropriate monetary policy stance

Especially in current conditions of exceptional uncertainty, it will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.

In particular, the governing council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The ECB Governing Council is not pre-committing to a particular rate path.

The council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises sustainably at its two per cent target over the medium term and to preserve the smooth functioning of monetary policy transmission.