The European Central Bank took interest rate cuts, lowering all three key interest rates by 25 basis points. The main refinancing interest rate was reduced to 4.25%, the marginal lending rate was reduced to 4.50%, and the deposit mechanism interest rate was reduced to 3.75%. This adjustment is in line with market expectations. The central bank emphasized its determination to return inflation to its 2% target and made no specific commitments on the future path of interest rates.
The central bank also reiterated its plan to gradually reduce the asset portfolio of the Emergency Epidemic Purchase Program (PEPP) in the second half of 2024. Since the September 2023 meeting, inflation has fallen by more than 2.5 percentage points, and the outlook for inflation has improved significantly.
Regarding future inflation expectations, the European Central Bank predicts inflation rates of 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, showing that inflation expectations have decreased at all levels.
Market participants expect that the European Central Bank may further cut interest rates this year, totaling about 40 basis points. After the interest rate cut decision was announced, the 10-year government bond yields of Germany and Italy both increased, reaching 2.549% and 3.849% respectively. This shows that the market responded positively to the European Central Bank's decision to cut interest rates.
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