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The European Central Bank cut interest rates by a quarter point to 3.25 percent, amid signs of weakening growth and inflation in the eurozone.
Thursday’s move took euro zone interest rates to their lowest since May 2023 and followed a cut of the same size at the ECB’s last meeting in early September.
While the cut was widely expected to take place, the ECB said it was based on an “updated assessment of the inflation outlook”.
Those price pressures could now be weaker than the central bank predicted last month, when it predicted inflation would rise by the end of the year but fall back below the 2 percent target in 2025.
ECB President Christine Lagarde said after the meeting that the disinflationary process was “well on track” and that all figures since the September elections were “heading in the same direction – lower”.
Lagarde said the decision to cut rates by 25 basis points was unanimous and that recent data had “certainly increased our confidence” that the central bank was on track to meet its 2 percent target. ‘Have we broken the neck of inflation? Not yet. Are we breaking that neck? Yes.”
The euro was slightly weaker at $1.084 in early trading after the announcement.
The rate cut, just five weeks after the previous step and with little additional economic data, indicated that “the ECB must have been much more concerned about the eurozone’s growth prospects and the risk that inflation will remain below target,” Carsten Brzeski, global head of macro at ING, said in a note to clients.
Eurozone inflation fell to 1.7 percent in the year to September, falling below 2 percent for the first time in more than three years.
“Incoming information on inflation shows that the disinflationary process is well on track,” the ECB said. “The inflation outlook is also affected by recent downward surprises in economic activity indicators.”
German officials have warned that Europe’s largest economy will shrink for a second straight year.
However, Lagarde said rate setters do not see a recession in the eurozone as the most likely scenario. “We’re looking at a soft landing,” she said.
Traders on the swap markets are expecting an interest rate cut of four or five quarter points by the middle of next year, including the virtual certainty of a cut in December. Policymakers insist they will not commit to an interest rate cut in advance at their last meeting in 2024.
The euro fell more than 2 percent against the dollar last month as expectations for faster rate cuts increased.
The ECB itself gave few clues on Thursday about the future path of its monetary policy. It reiterated that it took “a data-dependent approach to each meeting” and “did not pre-determine a particular rate path”.
Mark Wall, Deutsche Bank’s chief European economist, said Thursday’s decision could mark a “pivot” toward a faster return to lower interest rates.
The US Federal Reserve cut its benchmark interest rate for the first time in more than four years in September, cutting borrowing costs by half a point and putting more cuts on the way.
The Bank of England is also expected to cut interest rates again in November, following cuts earlier this year.
The ECB started cutting rates in June and has now cut borrowing costs three times. The decision was taken on Thursday in Ljubljana, at the Slovenian central bank.