For the first time, the ECB cuts interest rates, but the fight against inflation is still long

Translated by Alessandra Fumagalli 

As expected, during Christine Lagarde’s Press Conference, the President of the European Central Bank, the European Central Bank’s interest rates cut off has been confirmed.

It is the first transaction, after a continuous increase in the rates due to the inflationist crisis, that consists of 25 basis points. As we can see, the last time was 2016.

An executive board affirms that the decision was made based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission and it consists of the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be decreased to 4.25%, 4.50% and 3.75% respectively.

This happens during a rosier atmosphere than the one of the previous months, which were characterized by a total rise in 450 basis point of the rates. This can be seen in the reachment of an inflation rate of 2,6% in the Eurozone, in May, which is far away than the one reached in October, 2022, of 10,6%.

However, the news has circulated in a delicate situation, which can not foresee the following decisions. Indeed, the inflation’s situation may worsen in 2024, which is brought to 2,5%, but it was thought to be  2,3%. This will happen also in 2025, whose rate will be around 2,2%, but it was thought to be 2%, and than 1,9% in 2026[1].

Some other critics came up against ECB and Lagarde, that, according to macroeconomics rates, has made a decision in a critical situation. Indeed she assumed a controversial behavior, since she hasn’t followed a “data dependent” logics, rather a political one, as we can see in her actions.

It isn’t the first time that Lagarde lacks on the communicative aspect, negatively fomenting the markets’ expectations. That’s another crucial point that could lead to severe consequences.

After this wrong way to handle the news, that has fostered the fact that an open way towards the decrease in rates could be opened, other prudent actions followed, as we can hear from the President’s words during the press conference: “We must not engage in advance”, underlining the risks of the current inflation’s situation.

These wrong messages during a problematic phase jeopardize the fight against inflation, damaging the European economy in a delicate step[2].

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