European Central Bank Cuts Key Interest Rate by 0.25%p... Second Time This Year

The European Central Bank (ECB) further cut its key interest rate on the 12th (local time) for the first time in three months.

The ECB held a monetary policy meeting in Frankfurt, Germany, and announced that it lowered the key interest rate by 0.60 percentage points from 4.25% per annum to 3.65%, and the deposit rate by 0.25 percentage points from 3.75% per annum to 3.50% per annum.

[Image source=Yonhap News]

The marginal lending rate was also cut by 0.60 percentage points from 4.50% per annum to 3.90% per annum.

The ECB had previously cut all three policy rates by 0.25 percentage points in June. This marked a shift in monetary policy for the first time in 1 year and 11 months.

The ECB bases its monetary policy mainly on the deposit facility rate (DFR), which is the rate applied when commercial banks deposit overnight funds with the ECB. The key interest rate, also known as the main refinancing operations (MRO) rate, is applied to 7-day repurchase agreement (RP) transactions, similar to the base rate of the Bank of Korea.

Starting this month, the ECB decided to reduce the gap between the deposit rate and the key interest rate from the previous 50 basis points (1 bp = 0.01 percentage points) to 15 basis points, and adjusted the policy rates accordingly. This is to control volatility in short-term market rates amid decreasing excess liquidity.

The economic growth forecast for the Eurozone (20 countries using the euro) for this year was revised down from 0.9% to 0.8%, and next year's forecast was also lowered from 1.4% to 1.3%.

The consumer price inflation rate forecast remains unchanged at 2.5% for this year and 2.2% for next year.