The Key Refinancing Rate (MRR) is the interest rate set by a central bank (such as the European Central Bank) to provide loans to commercial banks within the Eurozone. The MRR plays a crucial role in influencing general market conditions and has several market implications:
Monetary Policy: The MRR is a key tool used by central banks to implement monetary policy. By adjusting the interest rate on loans, central banks can influence the cost of borrowing for commercial banks, which in turn affects the availability of credit in the economy. Changes in the MRR indicate a central bank’s stance on monetary policy, such as whether it wants to stimulate economic growth or curb inflation.
Interest Rates: The MRR serves as a benchmark for other interest rates in the economy. When a central bank raises or lowers the interest rate, it can lead to corresponding changes in other interest rates, such as interbank lending rates, mortgage rates, and consumer loan rates. These changes in interest rates affect the borrowing costs of companies and individuals, affecting their spending and investment decisions.
Borrowing costs for banks: The MRR directly affects the borrowing costs of commercial banks. When the interest rate on loans is reduced, banks can get money at a lower cost, making it cheaper for companies and individuals to lend. This could encourage banks to increase lending.
Economic activity: Changes in the maximum interest rate can have a significant impact on economic activity. A decline in the MRR can stimulate borrowing and investment, leading to increased consumer spending, business expansion, and economic growth. Conversely, an increase in the rate of return on loans can cool borrowing and investment, which could lead to a slowdown in economic activity.
Effects of the Key Refinancing Rate on Inflation and Aggregate Demand
The relationship between the main refinancing rate (MRR) and inflation rates is complex and multifaceted. Changes in the MRR can have direct and indirect effects on inflation:
Direct impact: The MRR system can directly affect the borrowing costs of commercial banks, which in turn affects interest rates in the economy. When the central bank raises the interest rate on loans, borrowing costs increase for banks, making it more expensive for them to obtain funds. Thus, banks may transfer these high costs to borrowers, resulting in higher interest rates on loans and credit. Higher prices can Interest discourages borrowing and spending, leading to lower aggregate demand, which can have a mitigating effect on inflation.
Indirect impact through aggregate demand: Changes in the MRR can affect aggregate demand, which is the total demand for goods and services in an economy. When the maximum interest rate is reduced, borrowing costs fall, encouraging borrowing and investment. This stimulates consumer spending, business expansion, and general economic activity, which can lead to an increase in aggregate demand. If the increase in aggregate demand exceeds the economy’s ability to produce goods Services, they can create excess demand, which can lead to upward pressure on prices and inflation.
Expectations and confidence: The MRR can also affect inflation expectations and market confidence. Central banks use changes in the MRR as a signal of their monetary policy stance. The decline in the monetary reserve rate can be interpreted as an accommodative policy stance, suggesting that the central bank aims to stimulate economic growth. This can boost market confidence and inflation expectations. Conversely, an increase in the rate of cash reserves can be seen as an increase in the cash reserve rate as a restrictive policy measure, suggesting that the central bank is concerned about inflationary pressures. This could help stabilize inflation expectations and possibly ease inflationary pressures.
Lack of clear ECB guidance after June rate cut
When the ECB cut interest rates at its June meeting, signals about future steps were almost completely absent. Only a few members took a stronger position on the schedule of additional movements. Panetta in Italy, one of the most cautious members of the Board of Governors, has continued to promote further cuts, while Casimir suggested in Slovakia that only one additional rate cut can be expected this year.
However, the vast majority of board members were more ambiguous in their comments, in line with the data-driven and meeting after meeting approach. Many commented that further cuts were expected if the baseline continued, while some said current market prices appeared reasonable..
Given the absence of signs that the recent data was largely in line with expectations and the ECB’s willingness to remove restrictions only gradually, another cut at the July meeting would be a major surprise. Moreover, given that another two months of inflation, labor market and wage data for the second quarter and a lot of other data will be released before the September 12 meeting, it would also be surprising if the ECB presented any tougher guidance at the July meeting..
The most to expect is a proposal for another rate cut if the data confirms the ECB’s baseline and the September forecast shows inflation is at the medium-term target.
Financial markets currently expect cuts of approximately 20 basis points for the September meeting, indicating the baseline at which the next cut will take place at that meeting. Almost nothing was priced for the July meeting. Our baseline remains low in September. While we do not expect any major market movements after the July meeting
