The European Central Bank (ECB) on Thursday announced a reduction in its three key interest rates by 0.25 per cent.

This brings the deposit facility rate to 2.75 per cent, the main refinancing operations rate to 2.90 per cent, and the marginal lending facility rate to 3.15 per cent.

According to the announcement, the new rates will take effect from February 5, 2025.

This move marks a significant step by the ECB as it seeks to stabilise inflation and support the euro area economy amidst tight financial conditions and ongoing headwinds.

“The Governing Council today decided to lower the three key ECB interest rates by 25 basis points,” the ECB stated in its announcement.

The decision to cut the deposit facility rate is driven by updated assessments of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.

“The disinflation process is well on track,” the ECB said, highlighting that inflation is expected to return to its medium-term target of 2 per cent by the end of this year.

While most measures of underlying inflation suggest stabilisation around the target, domestic inflation remains elevated due to lagging wage and price adjustments in certain sectors.

However, the ECB said that “wage growth is moderating as expected, and profits are partially buffering the impact on inflation.”

The ECB’s recent rate cuts are making borrowing cheaper for firms and households, which is expected to stimulate demand over time.

Despite this, the Governing Council acknowledged that “financing conditions continue to be tight, also because monetary policy remains restrictive and past interest rate hikes are still transmitting to the stock of credit.”

The ECB also affirmed its commitment to achieving sustainable inflation stability.

“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2 per cent medium-term target,” it stated.

Moreover, future monetary policy decisions will remain data-dependent and assessed on a meeting-by-meeting basis, with no pre-commitments to specific rate paths, the ECB explained.

Regarding asset purchase programmes, the ECB confirmed that its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios are declining predictably as the Eurosystem halts reinvestments of maturing securities.

In addition, banks have also repaid the remaining amounts borrowed under the Targeted Longer-Term Refinancing Operations (TLTROs), marking the conclusion of this phase in balance sheet normalisation.

“The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises sustainably at its 2 per cent target,” the ECB stated.

Finally, the Transmission Protection Instrument remains available to address disorderly market dynamics that could jeopardise monetary policy transmission across the euro area.