TLDR:
- ECB cuts interest rates by 25 basis points to 3.5%
- This is the second rate cut in three months
- Inflation has slowed to 2.2% in August
- Economic growth forecasts for eurozone downgraded
- ECB signals a “declining path” for future rates
The European Central Bank (ECB) has once again lowered interest rates, marking its second reduction in just three months.
On Thursday, September 12, 2024, the ECB cut its key deposit rate by 25 basis points, bringing it down to 3.5% from 3.75%. This move comes as the eurozone faces economic challenges, with inflation slowing and growth remaining weak.
ECB President Christine Lagarde stated that the rate cut was “perfectly appropriate” given the eurozone’s “gradual disinflationary process.” However, she refrained from committing to a specific future rate path, emphasizing the bank’s data-dependent approach.
The decision to lower rates is primarily driven by the region’s economic situation. Inflation in the eurozone has significantly decreased, averaging 2.2% in the year through August, down from 2.6% the previous month.
This figure is now much closer to the ECB’s 2% target. However, concerns remain about stubborn inflation in the services sector, which includes businesses such as hospitality and insurance.
Economic growth in the eurozone has been weak for over a year, partly due to reduced household spending and high interest rates hampering investment.
The ECB’s staff has slightly downgraded their growth forecasts for the region, projecting growth of 0.8% this year and 1.3% in 2025.
The rate cut is part of a broader trend among major central banks. The U.S. Federal Reserve is widely expected to begin its own rate-cutting cycle next week, while the Bank of England reduced rates last month for the first time since early 2020.
Despite these actions, interest rates remain far from what economists consider the “neutral rate” – a level that neither boosts nor restricts economic activity.
Many analysts predict that rate cuts might stop when they reach somewhere between 2% and 2.5%, though ECB officials have indicated that the exact level will only become clear as they approach it.
Market Reactions
The ECB’s decision has been generally well-received by financial markets. European stocks rose following the announcement, with the pan-European Stoxx 600 closing 0.78% higher. All major regional bourses ended the day in positive territory, reflecting investor optimism about the monetary policy shift.
However, challenges remain for the eurozone economy. A recent report by former ECB President Mario Draghi warned that Europe was lagging behind the United States and China in competitiveness, suggesting a need for nearly $900 billion in public investment in sectors like technology and defense.
Looking ahead, investors and analysts are divided on the pace of future rate cuts. Some expect quarterly reductions, while others believe the ECB might move more quickly if economic conditions deteriorate further.
The ECB’s next policy meeting in October will be closely watched, though sources suggest a further rate cut at that time is unlikely without a major change in the economic outlook.
As the eurozone continues to grapple with economic challenges, the ECB’s actions in the coming months will be critical in shaping the region’s financial future.
