The European Central Bank has cut borrowing costs for the third time since June, lowering its benchmark rate from 3.5% to 3.25%. This decision comes in response to recent data showing inflation across the eurozone falling to its lowest level in more than three years, and economic growth waning. Inflation in the 20-country eurozone sank to 1.7% in September, below the ECB’s target rate of 2%. The bank predicts an inflation pick-up in the coming months, with a return to its target expected in the course of next year.
ECB President Christine Lagarde suggested during a press briefing that the bank may not be planning to cut interest rates again at the next policy meeting in December. She emphasized a data-dependent and meeting-by-meeting approach to decision-making. Lagarde acknowledged weaker-than-expected economic activity, citing a contraction in the manufacturing sector and weaker exports. Despite Germany’s economic output shrinking slightly in the second quarter, Lagarde expressed confidence that the eurozone as a whole is not headed for recession, while noting potential risks from geopolitical conflicts and trade disputes.
Economists anticipate mounting pressure on rate-setters to consider further rate cuts to support economic growth in the eurozone. The region expanded by a modest quarterly rate of 0.2% in the second quarter, indicating a slowdown. It is likely that more rate cuts will be implemented starting in December and continuing into 2025, according to senior economist GianLuigi Mandruzzato. The ECB’s previous strategy of raising interest rates in 2021 to combat inflation has weighed on growth and now the focus is on providing stimulus to the economy.
Inflation rates are dropping globally, with central banks like the U.S. Federal Reserve also cutting interest rates in response. Central banks had previously increased borrowing costs during the coronavirus pandemic, in efforts to control inflation caused by supply chain issues and geopolitical events like Russia’s invasion of Ukraine. The ECB’s decision to cut rates in the face of falling inflation and economic growth aligns with similar actions taken by other central banks. The approach of a data-driven, meeting-by-meeting response to economic conditions underscores the ECB’s commitment to navigating uncertain economic waters in the eurozone.
