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The European Central Bank, which sets interest rates for the 20 countries that use the euro currency, cut borrowing costs once again on Thursday after figures showed inflation across the bloc falling to its lowest level in more than three years and economic growth waning.
The bank does not expect the bloc to slide into recession.
Its rate-setting council lowered the ECB’s benchmark rate from 3.5 per cent to 3.25 per cent – its third reduction since June – at a meeting in Llubljana, Slovenia, rather than its usual Frankfurt, Germany headquarters, and said the “disinflationary process is well on track”.
According to revised figures on Thursday, inflation across the 20-country eurozone sank to 1.7 per cent in September, the first time in three years that it has been below the ECB’s target rate of 2.0 per cent.
In a statement accompanying the decision, the ECB predicted an inflation pickup in the coming months, before a return to its target in the course of next year.
In a press briefing following the decision, ECB President Christine Lagarde gave few signals that the bank would be cutting interest rates again at the next policy meeting in December, stressing that the governing council is “not pre-committing to a particular rate path”.
She insisted that decisions will “follow a data-dependent and meeting-by-meeting approach”.
Lagarde did acknowledge that the recent data on economic activity had come in “somewhat weaker than expected”, pointing to a contraction in the manufacturing sector and weaker exports. Even though Germany, Europe’s powerhouse economy, saw output shrink in the second quarter, albeit by 0.1 per cent, Lagarde said that she didn’t expect the eurozone economy overall to fall into recession.
“On the basis of the information that we have, we certainly do not see a recession,” she said.
Economists think mounting evidence of an economic slowdown in the eurozone, particularly in Germany, will pile pressure on rate-setters to consider another cut to help bolster growth by making it even cheaper for businesses and consumers to borrow. In the second quarter of the year, the eurozone expanded by a modest quarterly rate of 0.2 per cent.
“Although the ECB did not pre-commit to any specific rate path, we believe that downside risks to growth in a context of easing inflationary pressure will lead to more rate cuts, starting in December and continuing in 2025,” said GianLuigi Mandruzzato, senior economist at EFG Asset Management.
The ECB, which was created in 1999 when the euro currency was born, started raising interest rates in the summer of 2021, taking them up to a record high of 4 per cent in September 2023 to get a grip on inflation by making it more expensive for businesses and consumers to borrow, but that has come at a cost by weighing on growth.
One reason why inflation has fallen around the world – it’s down at 2.4 per cent in the United States and 1.7 per cent in the United Kingdom – is that central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of Russia’s full-scale invasion of Ukraine in early 2022, which pushed up energy costs.
Other central banks, such as the US Federal Reserve, have also started to cut interest rates as inflation rates have fallen.
AP
English (US) ·