The 25 basis point rate cut that analysts had expected came on the back of subdued inflation and weak economic growth.
advertisementThe European Central Bank (ECB) cut interest rates on Thursday afternoon during its October board meeting, marking the third consecutive rate cut since June.
The new interest rates were set at 3.40% for major refinancing operations, 3.65% for marginal loan limits, and 3.25% for deposit limits.
The primary refinancing operation rate is the rate that banks pay when they need to borrow money from the ECB for a week, whereas the marginal lending facility rate is the rate that banks pay when they need to borrow money from the central bank overnight. It's cost.
The deposit facility rate, on the other hand, is the interest rate banks receive when they deposit money with the ECB overnight.
“The Governing Council today decided to reduce the ECB's three main interest rates by 25 basis points. “We will consider the inflation outlook, underlying inflation trends and the strength of monetary policy spillovers,” the ECB said in a statement.
“Future information on inflation indicates that the disinflationary process is on track. The inflation outlook is also affected by recent downward surprises in economic activity indicators,” the report said. “And the financing conditions remain restricted,” he added.
Policymakers met this month in Ljubljana, Slovenia, instead of their usual Frankfurt location.
lower inflation
The decision to lower borrowing costs came after eurozone inflation fell to a revised 1.7% in September from 2.2% in August.
The results marked the first time in three years that the total amount fell below the ECB's 2% target.
The decline was primarily driven by lower energy prices, but core inflation, which excludes volatile energy and food prices, remained solid at 2.7%, down slightly from 2.8%. Services inflation is also a stubborn outlier, at 3.9% year-on-year.
Nevertheless, economists say headline inflation is expected to remain around 2% for the remainder of 2024, although it may be slightly above target.
“Recent developments strengthen our confidence that inflation will return to target in a timely manner,” Lagarde told a European Union Parliament hearing in Brussels last month.
He added that the ECB would “take that into account” at its October monetary policy meeting.
lukewarm growth
Signs that the euro zone economy is stagnant also contributed to Thursday's rate cut, with many hoping lower borrowing costs will stimulate spending.
The growth rate for the second quarter of 2024 was sluggish at 0.2%, which has been revised downward from the previous forecast of 0.3%.
advertisement“This was due to lower-than-expected growth in private consumption and investment, as well as a decline in inventories, despite a higher-than-expected contribution from net trade,” the ECB said.
The ECB forecast a growth rate of 0.2% for the third quarter, but the ECB has revised the annual growth rate down to 0.8% from its June forecast of 0.9%.
The forecast for 2025 has been lowered from 1.4% to 1.3%.
Looking at other indicators, the HCOB Eurozone Composite PMI declined in September.
advertisementThe PMI total, based on survey responses from participants in the manufacturing and services sectors, fell below the benchmark 50 points, indicating a contraction in private sector activity.
Germany, the eurozone's largest economy, is in a particularly dire situation. The country's economy is projected to contract by 0.2% in 2024, after contracting by 0.3% in 2023.
The ECB's move on Thursday came after the US Federal Reserve cut interest rates by 50 basis points last month, its first rate cut since early 2020.
