The European Central Bank intervened with its first consecutive interest rate cuts since the 2011 euro crisis to prevent a sharp slowdown in the euro zone economy.
With Germany on the brink of recession and inflation sluggish across the 20 member countries of the single currency area, the ECB cuts its main deposit rate by a further 0.25 percentage points, following cuts in borrowing costs at its last Governing Council meeting in September. It was set at 3.25%. .
Marking the third interest rate cut this year, ECB President Christine Lagarde said the decline in inflation has taken the central bank by surprise and means rate cuts are necessary to ensure a soft landing for the eurozone economy. He said there was.
Statistics released early on Thursday showed annual price growth in the euro zone slowed to 1.7% in September from 2.2% the previous month.
Lagarde said there were clear signs from most indicators of business and consumer activity that the economy was weakening.
France's growth is expected to slow after recovering during the Olympics, while Italy's recovery from the inflation shock of the past two years has slowed more than expected. Only Spain has shown some resilience as interest rates remain high, rising 0.8% in the second quarter of this year.
Earlier this month, the HCOB manufacturing PMI, a measure of eurozone factory output, fell to a nine-month low in September, adding to more than two years of economic weakness.
“The latest statistics are all in the same direction – down, pointing to a further slowdown in growth,” Lagarde said.
He declined to say whether there would be further rate cuts, saying the central bank would continue to rely on data before making any further rate cuts at its next meeting in December.
The ECB's move is two places ahead of the Bank of England, which is widely expected to cut Britain's borrowing costs by 0.25 percentage points from the current 5% level at its monetary policy committee meeting next month.
In the United States, the Federal Reserve (Fed) has signaled its intention to cut interest rates in the coming months after implementing its first interest rate cut (0.5 percentage points) last month.
Gold hit an all-time high just before Thursday's ECB announcement, hitting $2,688.82 (£2,065.26) an ounce for the first time, boosted by expectations of interest rate cuts around the world and uncertainty ahead of next month's US presidential election. Reached.
Announcing the decision, the ECB said the rate cut was based on “the latest assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy spillovers.”
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Additionally, “Further information on inflation indicates that the deflation process is well underway. The inflation outlook is also affected by recent unexpected downsides in economic activity indicators.”
The deposit rate sets the return paid to euro zone banks when they make overnight deposits with the Eurosystem, the euro currency authority made up of the ECB and national central banks.
“Trends in the real economy and inflation support the case for lower interest rates,” said Holger Schmieding, chief economist at Berenberg Bank.
Joe Nellis, an economist at Cranfield University and an advisor at financial consultancy MHA, said the ECB would focus on boosting growth after borrowing costs remained high for a long period of time to fight inflation.
“Unlike the Bank of England, the ECB has a dual mandate and must take decisions that promote growth and reduce inflation. “They would hope to stimulate consumer spending, encourage investment and ultimately stimulate the economy.”
“The German economy is likely to contract for the second year in a row, and the ECB is expected to cut rates by another 0.25% in December. If policymakers are serious about boosting eurozone growth. , this will feel like a decision that has to be made in “the largest economy,'' he added.
