European Central Bank cuts interest rates as Eurozone growth slows and inflation cools

The European Central Bank delivered a quarter-point rate cut on Thursday. The move marks the second reduction to the deposit rate this year, following a landmark cut in June.

Like expected, the ECB has decided to cut its key interest rate to 3.5 per cent from 3.75 per cent. Some of the main drivers behind the rate cut include the bloc’s sluggish economic growth (the GDP grew by just 0.2% in the second quarter) and cooling inflation. In the Eurozone, annual inflation fell to 2.2 per cent in August, its lowest level since July 2021. It is now within reach of the ECB’s 2 per cent target.

At the same time, the European Central Bank warns that there are still challenges ahead. While headline inflation hit 2.2 per cent, 0.4 percentage points below the July level, the core inflation remained at 2.8 per cent. Services inflation even moved up from 4 per cent to 4.2 per cent.

In a press conference, European Central Bank President Christine Lagarde stressed that the bank’s cautious, step-by-step approach to economic policy won’t change. “Our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.”

Lagarde thus also countered some warnings, issued by actors like ECB Executive board member Isabel Schnabel and Bundesbank president Joachim Nage, against easing too rapidly. “We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.”

The ECB decision comes just a week before the Federal Reserve is expected to start its own rate-cutting cycle. 

^{President of the European Central Bank Christine Lagarde © BELGA PHOTO JAMES ARTHUR GEKIERE}