This Thursday, 12 September, the European Central Bank (ECB) will release its interest-rate decision and is expected to make the unusual decision to cut some rates by 0.25 percentage points and some by 0.6 percentage points, as opposed to moving all three key interest rates by the same amount.
Key ECB interest rates
The refinancing rate, currently at 4.25%, is expected to drop by 0.6 percentage points to 3.65%. This is the headline ECB interest rate and affects the cost of loans for commercial banks.
The deposit rate sets the interest rate commercial banks receive for depositing excess liquidity with the ECB. This is the lower limit of interest rates and is expected to be reduced by 0.25 percentage points to 3.5%.
The Lombard loan rate is the interest rate on short-term loans banks can obtain from the ECB if they need additional liquidity. This is the upper limit of interest rates and is expected to be reduced by 0.25 percentage points to 4.25%.
The ECB's new rate corridor policy
In March, the ECB announced its aim to reduce the corridor between the deposit and refinancing rates by 0.15 percentage points from the current 0.5 percentage points.
This rate corridor policy aims to wean banks off cheap sources of financing in place during the pandemic, reduce excess liquidity in the interbank market and prepare the financial system for a more balanced monetary policy in the future.
While this reduction might seem significant it isn't surprising, as the ECB has signalled this move consistently, and current economic data, including lower inflation and weaker growth, appear to support the decision.
Potential impact on the euro
The ECB's move will signal a shift to a more accommodative monetary policy, which could boost economic growth in the eurozone by encouraging banks to increase lending for consumer spending and investment.
The market has been aware of this rate corridor change since March, but algorithms reacting to current data may cause short-term confusion. In the medium term, the ECB's rate cuts could boost economic growth and may benefit the euro.
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