Here comes the second rate cut with which the ECB undoes the monetary tightening that began during the energy crisis of 2022-2023. But if the deposit rate – which has been the benchmark for the cost of money for years – will probably fall by 25 basis points, the new regime with which the ECB directs monetary policy will come into force at tomorrow’s meeting. With the result that The rate on refinancing to banks will probably fall by 60 basis points: 25 of which will come from a reduction in the cost of money, and 35 due to an expected technical adjustment of the new ‘operational framework’ announced by the ECB in March.. After the summer to assess the macroeconomic picture, for the European Central Bank the data seem to be converging towards a sustainable cooling – the condition set by President Christine Lagarde to be able to cut – of inflation close to the 2% target. Looking at the weakest economies, such as Germany, the risk is that keeping rates at current levels could trigger a recession. Even returning to inflation chronically below 2%. Compared to the cautious picture painted by ECB chief economist Philip Lane in Jackson Hole last month, inflation has slowed to 2.2% in the meantime, a three-year low. Even German hawk Joachim Nagel has opened up to a rate cut in September. Executive Board member Piero Cipollone warns that maintaining the current restrictive policy for too long risks having serious repercussions on growth. After the 25 basis point cut decided in June, therefore, the ECB would cut by the same amount tomorrow, then again in December and on a quarterly basis during 2025. Barring any negative inflation surprises, which could open the possibility of more frequent cuts: on this, Lagarde’s words could provide clues tomorrow.
News that supported the stock markets, even if today the gains are tempered (and for Milan and Paris cancelled: -0.12% and -0.14%) by the core inflation in the US still at 3.2%, which puts at risk the expected half-point rate cut by the Fed at the meeting on 17-18 September. The reading of the ECB rates, tomorrow, will be complicated by the arrival of the new ‘operational framework’. After more than a decade of liquidity provided to banks by massively purchasing bonds with ‘quantitative easing’, with liquidity gone from zero to the current over 3,000 billion euros, the ECB in March 2023 began to sell off those securities. Now it aims to return to a system in which bank supply occurs mainly on the money market. To prevent this return to normality from causing shocks to market rates, in March (but with effect from September) the Governing Council decided to narrow the ‘corridor’ with which it guides the cost of money: the spread between the rate on main refinancing (the one that acts as a ‘ceiling’ for interbank rates, currently at 4.25%) and the rate with which the ECB remunerates banks’ overnight deposits (the one that acts as a ‘floor’, in fact the reference rate, currently at 3.75%), from the current half a point is reduced to 0.15 percentage points. With the consequence that if tomorrow the ECB, as expected, cuts rates by 0.25, the rate on deposits will fall by a quarter of a point to 3.5%, but the rate on main refinancing by a good 0.6 points, suddenly going from 4.25% to 3.65%. A maxi-cut that is only apparent: what matters for the cost of money is the deposit rate, which should drop by a quarter of a point.