Christine Lagarde, President of the European Central Bank (ECB), and Vice-President Luis de Guindos announced a reduction in the ECB's key interest rates by 25 basis points. This decision follows an updated assessment of inflation and monetary policy transmission. "Based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady," said Lagarde.
Since September 2023, inflation has decreased by over 2.5 percentage points, with improvements noted in both headline and core inflation projections for 2024 and 2025. Despite this progress, domestic price pressures remain due to elevated wage growth. The ECB staff projects headline inflation at 2.5% in 2024, decreasing to 1.9% by 2026.
The euro area economy showed signs of recovery with a growth rate of 0.3% in Q1 2024 after five quarters of stagnation. Employment also rose by 0.3%, adding approximately 500,000 jobs during this period.
The ECB plans to reduce its holdings under the pandemic emergency purchase programme (PEPP) by €7.5 billion monthly over the second half of the year. This reduction aligns with strategies used under the asset purchase programme (APP).
Lagarde emphasized that "we are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner." The ECB will maintain restrictive policy rates as needed while continuing a data-dependent approach for future decisions.
Eurostat reported annual inflation at 2.6% in May, with notable changes across various sectors including food and energy prices. While measures indicate diminishing price pressures, domestic inflation remains high due to rising wages.
Risks to economic growth remain balanced short-term but lean towards downside risks medium-term due to geopolitical tensions and potential global trade disruptions from conflicts such as Russia's war against Ukraine.
Market interest rates have risen since April's meeting, stabilizing financing costs at restrictive levels while credit dynamics remain weak.
In conclusion, Lagarde highlighted that Euro area banks are resilient amid improving economic conditions but cautioned about heightened geopolitical risks affecting financial stability.