The ECB Cuts Rates Again While Making Changes to Its Operational Framework September 12, 2024

The main refinancing operations rate used to be our indicator for where eurozone monetary policy is going. But that rate ceases to be meaningful when the money market is flooded with excess liquidity. The deposit facility rate has become the main benchmark for the eurozone's money market. The 's changes to its operational framework reflect this new reality. Other central banks have made similar changes to their operational frameworks, including the Bank of Canada, which sets its target for the overnight rate to be equal to the deposit rate. The has decided that the spread between its deposit rate and its main refinancing operations rate will be set at 15 basis points.

The central bank's decision to lower its key rate by 25 basis points was widely expected. After an initial rate cut in June, the decided to pause in July due to a belief that some indicators called for caution. The latest inflation figures showed headline inflation falling again, but core inflation, which strips out food and energy, remained unchanged (graph 1). One of the 's main concerns is services inflation, which is strongly correlated with wage growth. But the good news is that recent indicators show wage growth cooling (graph 2). The expects this trend to continue, which should help rein in services inflation in 2025. The job market also shows signs of slackening, which should help bring wages under control. Furthermore, the is reassured by the fact that companies are tightening their profit margins to absorb some of the rise in labour costs. It believes these trends will remain in place in the coming years.

Productivity was a major topic of discussion during the press conference that followed the monetary policy meeting. Former president Mario Draghi recently released a report that suggested ways to improve eurozone productivity. The assumes productivity will ramp up gradually, which will help reduce inflation.