Expected decision from ECB: Key interest rate to drop to 0.25 percent

The Governing Council of the European Central Bank (ECB) at its meeting on Thursday, as expected, decided to cut the key interest rate by 0.25 percent.

The key interest rate, i.e. commercial bank deposit rate, is now 3.75 percent.

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Interest rate on basic financial operations and ready-to-back loan interest rate reduced by 0.25 per cent.

This is against the background of the central bank’s assessment that inflationary pressures in the euro area have sufficiently eased and the direction of wage rises has quietened since the start of the year.

According to the ECB, since September last year, inflation has declined by more than 2.5 percentage points and the inflation outlook has clearly improved. According to the ECB, the slowdown in inflation means that price pressures have leveled off.

The acceleration of wage rises will continue to add to price pressures, and inflation will remain above the two percent target until next year, the ECB warns.

– The ECB Council remains committed to ensuring that inflation returns to its medium-term target of 2 percent. The ECB said after Thursday’s decision that it would keep key interest rates tight as long as necessary to meet this target.

The market is already waiting for a long time for the interest rate cut in June.

This is the ECB’s first interest rate cut since September 2019.

Senior Market Economist at OP Financial Group Jari Hannikinen The interest rate cut has been attributed to a change in monetary policy. The central bank is expected to gradually cut interest rates throughout the year.

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– Interest rate cuts are rarely isolated because, in light of history, the start of interest rate cuts heralded more interest rate cuts, reminds Hännikäinen in a press release from the OP Finance Group.

What happens next?

Economist at analytics firm Inderes Marianne Balmun According to the market predict 2-3 rate cuts this year.

– In my opinion, before the next bill, we need to get confirmation on easing service inflation as the central bank’s monetary policy is not on autopilot. As economic growth picks up, demand-driven inflation may also rear its head, so there is a risk that bills won’t be launched this year in the timeframe the market expects, Palmu writes in Interest. In the morning review.

While many have criticized the ECB for waiting too long to cut interest rates, Palmu reminds us that there are no better options available.

He refers to the ECB’s own research paper which models different interest rates. According to it, earlier interest rate hikes would have partially mitigated the inflationary spike, but caused more damage to economic growth than now.

– On the other hand, with a less-longer policy, inflation would still be in the 5-6 percent range, meaning a worse problem. Swamp there, wade here, Palmu writes, may be an appropriate term when thinking about optimal monetary policy.

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