The European Central Bank cut interest rates for the third time in about four months on Thursday, as inflation cooled faster than expected and economic growth slowed in the euro zone.
Policymakers who set interest rates in the 20 countries that use the euro cut the key rate by a quarter of a percentage point to 3.25%. Thursday's decision comes just five weeks after the central bank's previous interest rate cut, the day the eurozone's inflation rate slowed to 1.7% in September, falling below the central bank's 2% target for the first time in three years. It was carried out on the day the report stated that .
“The process of defusing inflation is progressing well,” central bank governor Christine Lagarde said at a press conference in Ljubljana, Slovenia.
The interest rate movement was also influenced by weaker-than-expected economic data over the past few weeks. Whether it's inflation statistics or surveys of economic activity, “it's the same story,” she said, “and they're all going in the same direction: down.”
Central bankers around the world, who have been trying to tamp down inflation with high interest rates for years, are walking a tightrope as they consider how quickly to cut rates. Cutting rates too quickly could reignite smoldering inflationary pressures, but keeping interest rates too high for too long risks slowing the economy too much and causing inflation to weaken too much.
Policymakers have signaled in recent weeks that they could cut rates more aggressively as inflation has slowed significantly and economic growth has been lackluster. The US Federal Reserve cut interest rates by half a percentage point last month, paving the way for faster or larger rate cuts in Europe, analysts said. Traders on Wednesday predicted the Bank of England would accelerate the pace of interest rate cuts after data showed Britain's inflation rate fell to 1.7% in September, below the Bank of England's 2% target. strengthened his view.
A few weeks ago, the European Central Bank's first consecutive interest rate cuts since 2011 seemed nearly impossible. Central bank policymakers had stressed that they would take a cautious approach to cutting interest rates as service sector inflation remained high at around 4%. Traders had said they expected the bank to wait until December to cut rates again. But Lagarde said in early October that the latest economic data gave officials more confidence that inflation would return to target “in a timely manner.”
Lagarde added on Thursday that September's inflation reading of 1.7% was not expected by the central bank or other forecasters. “I think we were all a little surprised,” she said.
Inflation in the euro zone is expected to rise in the coming months and return to the central bank's target of 2% next year, the central bank said on Thursday.
Concerns about the euro area economy are growing. Recent figures have been weaker than the central bank expected, with consumer spending not picking up as much as expected, even as lower inflation boosts incomes.
“The information we have suggests that economic activity was slightly weaker than expected,” Lagarde said.
He said the manufacturing industry continues to contract, the service sector is weak, business investment is slow, housing investment is down and exports are also weak.
Business activity in the euro zone contracted in September, with the region's three largest economies (Germany, France and Italy) contracting simultaneously for the first time this year, according to a survey of purchasing managers.
Matthew Landon, a strategist at JPMorgan, said in a note that successive Governing Council rate cuts signal that ECB officials' concerns are “shifting from inflation to growth.”
For now, central bankers are tentatively working toward an interest rate that they believe will keep inflation steady at 2% over the medium term, without restricting or stimulating the economy. Many economists expect the rate to be around 2% to 2.5%.
“We are not committing in advance to any particular interest rate path,” Lagarde said, repeating earlier statements. The central bank's next interest rate decision will be in December. Traders widely expect further rate cuts in December and the next four meetings.
