The European Central Bank cut interest rates by a quarter of a point in a second straight meeting on Thursday as policymakers try to deal with twin slowdowns in inflation and economic growth.
It is the first consecutive reduction in borrowing costs in 13 years and is a sign that the ECB is beginning to move away from a period of interest rate hikes aimed at suppressing high inflation.
Instead, the ECB has signaled it is refocusing its policy on trying to revive a faltering eurozone economy that has struggled to keep up with the US for most of the past two years.
Surveys of business activity and climate in the region missed estimates in September. Meanwhile, an updated measure of inflation released ahead of the ECB’s announcement showed that consumer price growth slowed year-on-year to 1.7% last month. The mark, which was originally 1.8%, is below the central bank’s stated target of 2%.
“Incoming inflation data shows that the deflationary process is on track. The outlook for inflation is also affected by recent downward surprises in indicators of economic activity,” the ECB said in a statement.
The 25 basis point cut brings the rate the ECB pays banks on their deposits to 3.25%, widening the gap with the US Federal Reserve. The US central bank cut its target interest rate by 50 basis points last month, to a range of 4.75% to 5.00%.
Meanwhile, policymakers chose to refrain from articulating specific policy directions, reiterating that it is not “pre-committing to a particular path of interest rates” and that it will develop future decisions based on its “assessment of the outlook for inflation under light of incoming economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission’.
That stance was “sensible” given the uncertainty facing the Eurozone economy, according to Mark Wall, Deutsche Bank’s chief economist for Europe.
However, Wall added: “[Usually today’s decision is a turning point towards a faster normalization of monetary policy.”
In a note to clients, Capital Economics analysts said they expected the upcoming economic data to support declines of a quarter of a point in “each of the next few meetings, at least.”
Following the ECB announcement, which was widely expected by markets, the euro was trading slightly lower against the dollar.
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Reference;
Kanowsky, S. (2024) ECB cuts interest rates to 3.25% By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/economy/ecb-cuts-interest-rates-to-325-3668512 (Accessed: 17 October 2024).
