In line with expectations, the ECB today decided to lower its three key interest rates by 25 basis points, the fifth cut of the current cycle. This decision signals confidence in the disinflation process while acknowledging persistent domestic price pressures. The deposit facility rate cut reflects an updated assessment of inflation, which is expected to stabilise at the 2 percent target by year-end.

While monetary easing should gradually reduce borrowing costs, restrictive policy effects linger as maturing loans are refinanced at higher rates. Despite economic headwinds, rising real incomes and the waning impact of past rate hikes could stimulate demand. The ECB remains data-dependent, avoiding commitment to a fixed rate trajectory, and ensuring flexibility in responding to evolving inflationary trends.

Balance sheet normalisation continues with the measured reduction of the APP and PEPP portfolios, while the repayment of targeted refinancing operations marks a shift towards pre-pandemic policy conditions. Additionally, the Transmission Protection Instrument remains a safeguard against disorderly market movements.

Overall, the ECB's approach balances economic support with inflation control, signalling a more accommodative stance while maintaining vigilance over inflation dynamics and financial stability.

After the latest comments from President Christine Lagarde, all expect a non-controversial 25 bp rate cut.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the 20 presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.