The European Central Bank (ECB) has cut its key interest rates by 0.25 percent in its meeting on Thursday, just days ahead of a much anticipated decision by the US Fed.
- •Thursday’s rate cut is the second such reduction in the year after a similar one in June.
- •The unanimous decision was in response to softening inflation in the Eurozone and a slowdown in the economy.
- •The ECB also lowered the interest rate on the marginal lending facility to 3.9 percent from 4.5 percent and slashed the interest rate on refinancing operations to 3.65 percent.
“We thought that given that gradual disinflationary process it was perfectly appropriate to moderate the degree of monetary policy restriction,” ECB President, Christine Lagarde said on Thursday.
In August, the euro zone inflation edged to 2.2 percent, to the 2 percent target, – a 3 year low on falling energy prices. This only raised expectations of further interest rate cuts which have been actualized.
“Labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation,” the ECB said on Thursday adding that “Financing conditions remain restrictive, and economic activity is still subdued, reflecting weak private consumption and investment.”
Why it Matters
Central banks in major economies have begun lowering rates in response to softening inflation and possible slowdown in the economy, with the Fed expected to meet next week with analysts anticipating 25-50 basis points rate cuts, according to a recent poll by Reuters. Switzerland was the first major economy to cut rates in 2024, cutting 25 basis points in March.
“The Governing Council today decided to lower the deposit facility rate – the rate through which it steers the monetary policy stance – by 25 basis points,” ECB said in a statement.
The ECB projects that the economy will grow by 0.8 percent in 2024, rising to 1.3 percent in 2025 and 1.5 percent in 2026 – a lower forecast – citing “a weaker contribution from domestic demand over the next few quarters”. Further, inflation is expected to decline gradually to 2.5 percent in 2024, 2.2 percent in 2025 and 1.9 percent in 2026, as in the June projections.
In 2024, the ECB has now cut a total of 50 basis points. According to Lagarde, the decision was “perfectly legitimate,” and based on a review of incoming data, analysis from ECB staff and the consistency of projections.