The European Central Bank (ECB) has cut interest rates again, for the second time in a row, as inflation in the euro zone cools more quickly than expected. The ECB on Thursday cut its benchmark deposit rate by a quarter of a percentage point, following a similar cut in September. The move would reduce interest rates to 3.25% after peaking at 4%.
This will be the first consecutive rate cut since the ECB began the current easing cycle in response to falling inflation. The decision was announced after inflation data for September was revised downward, with consumer prices in the euro zone rising 1.7% year-on-year, slightly lower than the 1.8% initially expected.
The ECB said the latest data confirmed that inflation was slowing as expected and that prices were likely to rise in the coming months before returning to the central bank's 2% target next year. The rate-setting committee met in Slovenia as part of a regular inspection outside its Frankfurt headquarters and decided to cut interest rates for the third time since their peak.
The ECB had previously raised interest rates aggressively in response to soaring inflation caused by the coronavirus pandemic and Russia's invasion of Ukraine. But recent weaker-than-expected inflation rates have reassured policymakers that prices are stabilizing. Furthermore, signs of weakening in the euro area economy prompted the ECB to further ease borrowing costs, providing some relief to households and businesses.
“Recent unexpected developments in the downturn in economic activity indicators have increased our confidence that inflation is on track towards the 2% target,” the ECB said. Analysts such as ING's Carsten Brzeski believe the swift rate cut shows the ECB is more concerned about the eurozone's growth prospects than before. There was now a risk that inflation would even fall below target, he warned.
Economists have suggested that Thursday's cut may signal the ECB's urgency to lower interest rates quickly. Although the ECB is taking a cautious “data-dependent” approach in assessing economic conditions before deciding on future rate cuts, analysts say further rate cuts are likely in the coming months. I predict that.
Following the announcement, ECB President Christine Lagarde is scheduled to give a speech, and her comments are expected to give hints about the future trajectory of interest rates. Some analysts predict that the ECB could continue to cut interest rates until they fall to a “neutral” level of around 2-2.5% by mid-2025.
