ECB cuts rates as inflation falls and economy-building concern rises

The European Central Bank (ECB) cut its key benchmark interest rates for the second time this year as inflation receded towards 2 per cent and concerns loom over economic building, reported the news agency Bloomberg on Thursday, September 12.
The ECB’s key deposit rate was reduced 25 basis points to 3.5 per cent on Thursday, in line with analyst expectations. The European Central Bank reaffirmed that it cannot commit to a specific path for borrowing costs, as per the agency report.
“Based on the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary-policy restriction,” they said in a statement, quoted the agency.
Traders have reduced their expectations of further easing, estimating a 36 basis points cut more by the end of the year. This means an additional quarter-point cut is fully priced, and there is less than a 50 per cent chance of another similar move, according to the report.
Like its global peers, Europe’s central bank is becoming more confident that consumer price growth is coming back to target after its historic rise. The euro zone’s 20-nation economy is losing momentum. The households are failing to support the rebound that started earlier in the year, and manufacturers remain in the doldrums due to light demand from outside the single currency area, according to the report.
The weakness drove the ECB to trim its forecasts for gross domestic product (GDP) in 2024, 2025, and 2026, now seeing an expansion of 0.8 per cent compared to 0.9 per cent in the last round of quarterly projections. The inflation outlook was broadly kept unchanged, as per the report.
Two other rates at which banks can borrow from the ECB were reduced by 60 basis points each as a part of a long-term strategic shift that will have few immediate consequences, according to the agency report.
The ECB’s decision on Thursday comes less than a week before the US Federal Reserve tip to begin loosening the US interest rates. The Bank of England, meets a day later, they have reduced rates once so far, as per the report.
The ECB’s announcement comes after inflation fell to 2.2 per cent in August and the figures that the rapid wage increases driving price gains, especially in the services sector, are slowing down, as per the report.
Rate cuts cannot be mechanical and must “rest on data and analysis,” said Isabel Schnabel, executive board member. Chief Economist Philip Lane said the return to 2% isn’t yet “secured,” though he cautioned that high borrowing costs shouldn’t choke the economy, as per the report.
Europe’s sluggish growth can persist long into the future, warned former ECB chief Mario Draghi, cited the agency report.
The outlook for the interest rates currently looks somewhat predictable. Analysts in the Bloomberg poll eye cuts each quarter until September 2025, according to the agency report. Goldman Sachs now forecasts reductions at every meeting next year until the deposit rate reaches 2% in July, said the report.