The European Central Bank (ECB) reduced interest rates by a quarter-point to 3.25 percent, as indicators suggest a weakening in growth and inflation within the Eurozone. This decision, announced on Thursday, marks the lowest point for Eurozone rates since May 2023 and follows an identical reduction at the ECB’s previous meeting last month.
Although the rate cut was largely expected, the ECB attributed its decision to an “updated assessment of the inflation outlook,” implying that inflationary pressures might be softer than previously anticipated. Last month, the ECB had forecasted inflation to rise towards the year’s end, ultimately falling below its 2 percent target in 2025.
Following the announcement, the euro experienced a slight depreciation in early trading, settling at $1.084. The decision to cut rates just five weeks after the previous adjustment, without significant new economic data, suggests heightened concern within the ECB regarding the Eurozone’s growth prospects and the risk of inflation falling short of the target, according to Carsten Brzeski, ING’s global head of macroeconomics.
Inflation within the Eurozone decreased to 1.7 percent in the year leading to September, marking the first dip below 2 percent in over three years. The ECB commented that the disinflationary process is advancing well, with the inflation outlook also impacted by recent negative surprises in economic activity indicators.
German officials have issued warnings of a potential contraction in Europe’s largest economy for the second consecutive year. Swap market traders anticipate another four or five quarter-point rate reductions by the middle of next year, with high confidence in a December cut. The euro has declined by more than 2 percent against the dollar over the past month as expectations of accelerated rate cuts have risen.
On Thursday, the ECB provided limited guidance on its future monetary policy direction, reaffirming its commitment to a “data-dependent and meeting-by-meeting approach” without committing to a specific rate path. Mark Wall, Deutsche Bank’s chief European economist, suggested that Thursday’s decision could signify a “pivot” towards more rapid rate reductions.
The US Federal Reserve, in September, lowered its benchmark interest rate for the first time in over four years, reducing borrowing costs by a half-point and indicating further cuts. The Bank of England is also projected to cut rates again in November, following reductions earlier in the year. The ECB initiated rate cuts in June and has now lowered borrowing costs three times. The decision on Thursday was made in Ljubljana at the Slovenian central bank.