๐Ÿค” ECB decreases its reference interest rate, but why?ย 

June 10, 2024

Last week, after a years long rally of increases of its reference interest rates, ๐˜๐—ต๐—ฒ ๐—˜๐˜‚๐—ฟ๐—ผ๐—ฝ๐—ฒ๐—ฎ๐—ป ๐—–๐—ฒ๐—ป๐˜๐—ฟ๐—ฎ๐—น ๐—•๐—ฎ๐—ป๐—ธ (๐—˜๐—–๐—•) ๐—ณ๐—ถ๐—ป๐—ฎ๐—น๐—น๐˜† ๐—ฑ๐—ฒ๐—ฐ๐—ฟ๐—ฒ๐—ฎ๐˜€๐—ฒ๐—ฑ ๐—ถ๐˜๐˜€ ๐—ฟ๐—ฎ๐˜๐—ฒ๐˜€ ๐˜„๐—ถ๐˜๐—ต ๐Ÿฎ๐Ÿฑ ๐—ฏ๐—ฝ๐˜€. Weโ€™ll summarize the reasoning behind this decision.

โ— Whenย  reading this article, keep in mind that the primary role of the ECB is to control inflation at a rate close to 2%. Primary data to monitor this are the current level of inflation, the inflation outlook and the costs of labour.

The past months ECB kept on communicating the following:ย 

๐Ÿ”ท It will decrease reference rates in June 2024ย 

๐Ÿ”ท Interest rate decisions are purely data driven

What do data tell us?

โ—พ Inflation does not decrease anymore, is even tending to increaseย 

โ—พ The inflation outlook is showing an increasing inflation till the end of 2025ย 

โ—พ Cost of labour did not decrease and even increases

What were the reasons given for reducing the interest rate?ย 

โ—พ We said we would decrease in June, so we decrease in June!ย 

โ—พ The inflation outlook is maybe not positive on the short term, but the outlook end of 2025 is stableโ€ฆย 

โ—พ Nevertheless the data, we have confidence that the inflation will decreaseโ€ฆ

๐Ÿง  At Ernest Partners we needed a bit of time to debate and digest these arguments guiding the decision to reduce the reference rates. Inflation and related market data signals a stand-still in interest rate would have been a rational decision. And yes, the European economy is growing at a very slow pace, and markets and governments would not have liked such a decisionโ€ฆ

โณ Time will tell if the gut feeling of ECB directors steered the inflation and the economy in the right directionโ€ฆย ย 

Nicolas van Klinkenberg

www.ernestpartners.eu