ECB cuts rates again, eurozone inflation is at the right level

The European Central Bank (ECB) cut rates again on Thursday by 25 basis points, from 3.50% to 3.25%, to try to boost weak economic growth in the euro zone after inflation was brought under control.

“The latest information on inflation shows that the deflation process is continuing as planned,” the ECB, which is headquartered in Frankfurt, said in a statement.

“The inflation outlook is also affected by recent surprises in the decline in economic activity,” added the issuer of the euro zone, which includes 20 of the 27 countries of the European Union.

This is the second consecutive reduction in the key rate by the ECB, which already made a similar reduction in September, and the third this year, after June, by a similar percentage.

ECB President Christine Lagarde said after the announcement that the outlook for economic growth in the euro zone was “targeted downward” and that “lower confidence could prevent consumption and investment from recovering as quickly as expected.”

After the last meeting of ECB governors, eurozone monetary policymakers sounded cautious and suggested the issuer would wait until December before deciding on another rate cut.

But since then, inflation has shown a slowdown.

Price growth in the eurozone was 1.7% in September, below the official target of around 2% for the first time in more than three years.

Additionally, core inflation, which excludes items with highly volatile prices such as energy and food, slowed to 2.7% year on year, according to Eurostat.

– Recession in Germany –

On the other hand, economic growth looks sluggish, prompting the ECB to cut rates to stimulate consumption and investment.

Among the bad news governors have weighed is a downward revision in 2024 to the growth rate of Germany, the bloc’s largest economy, which is set to register a second straight year of recession.

The German government estimates the contraction will be 0.2% after the end of 2023, with GDP falling by 0.3%.

In the eurozone, private sector activity contracted in September for the first time in seven months, overshadowed by the end of the positive effect of the Paris Olympic Games.

Eurozone GDP grew 0.2% in the second quarter after recording 0.3% growth in the first three months of the year.

However, ECB leaders, who met in the Slovenian capital Ljubljana, did not commit to further cutting rates.

The ECB “will continue to take a data-driven approach, with decisions taken at each meeting to determine the appropriate level of restrictions and their duration.”

Most economists surveyed predict the ECB will continue to cut rates until they reach 2%, a level considered neutral that neither stimulates nor slows the economy.

The ECB began raising interest rates in 2022 to counter the impact of the economic recovery from the Covid pandemic and the Russian invasion of Ukraine in February 2022, which sent energy prices soaring.

The rate hike cycle saw rates rise to 4% in September 2023, with the recession starting in June this year to provide relief to households and businesses, stimulate consumption, the property market and investment.

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