summary:
- ECB cuts interest rates by 25 basis points to 3.5%
- This is the second rate cut in three months.
- Inflation slowed to 2.2% in August
- Eurozone economic growth forecasts revised down
- ECB hints at “downward trend” for future interest rates
The European Central Bank (ECB) cut interest rates again, for the second time in just three months.
On Thursday, September 12, 2024, the ECB cut its key deposit rate by 25 basis points, from 3.75% to 3.5%. The move comes as the eurozone faces economic challenges, with inflation slowing and growth still weak.
European Central Bank President Christine Lagarde said the cut was “fully appropriate” given the euro zone's “gradual deinflation process,” but she refrained from committing to a specific future interest rate path, stressing the bank's data-dependent approach.
The decision to cut rates was driven primarily by the region's economic situation. Eurozone inflation has fallen sharply, averaging 2.2% in the year to August, down from 2.6% the previous month.
That figure is very close to the ECB's 2% target, but concerns remain about persistent inflation in services sectors such as hospitality and insurance.
Economic growth in the euro zone has been sluggish for more than a year, due in part to falling household spending and high interest rates discouraging investment.
ECB staff slightly revised down their growth forecasts for the region, predicting growth of 0.8 percent this year and 1.3 percent in 2025.
The cut is part of a broader trend among major central banks: The U.S. Federal Reserve is widely expected to begin its own rate-cutting cycle next week, and the Bank of England cut interest rates last month for the first time since early 2020.
Despite these measures, interest rates remain far from what economists consider to be “neutral rates” — levels that neither boost nor restrict economic activity.
Many analysts predict the rate cut could stop between 2% and 2.5%, but ECB officials have suggested the exact level won't be clear until they get closer to that point.
Market reaction
The ECB's decision has been generally well received in financial markets. European stocks rose following the announcement, with the pan-European Stoxx 600 index closing up 0.78%. All major regional stock exchanges ended in positive territory, reflecting investor optimism about the shift in monetary policy.
But challenges remain for the euro zone economy: A recent report by former European Central Bank President Mario Draghi warned that Europe is lagging behind the United States and China in competitiveness and needs nearly $900 billion in public investment in areas such as technology and defense.
Investors and analysts are divided on the pace of future rate cuts, with some predicting quarterly cuts and others saying the ECB could act more quickly if economic conditions worsen.
The ECB's next policy meeting, scheduled for October, will be closely watched, but sources have suggested further rate cuts are unlikely at that point unless there is a major change in the economic outlook.
As the euro area continues to grapple with economic challenges, the ECB's actions in the coming months will be crucial in shaping the region's financial future.
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