| Updated:
The European Central Bank (ECB) cut interest rates for the second time this cycle reflecting the continued progress on inflation and “subdued” economic activity.
The decision, which was widely anticipated by investors, means that the main interest rate now stands at 3.5 per cent, down from the peak of 4.0 per cent reached last September.
“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,” the ECB said.
Despite the cut, interest rates remain in restrictive territory in the eurozone, meaning monetary policy is still bearing down on inflation and slowing growth.
The ECB voted to cut interest rates for the first time in five years back in June, but policymakers left rates on hold last month in a sign that they want to take a cautious approach to easing policy.
Inflation across the eurozone fell to 2.2 per cent in August, down from 2.6 per cent the month before and the lowest level since July 2021.
Growth has also been weak in the bloc this year. The eurozone grew just 0.2 per cent last quarter and the ECB noted that economic activity was “subdued”. In updated forecasts, it suggested that the eurozone would grow just 0.8 per cent this year.
Yael Selfin, chief economist at KPMG UK, said the ECB had been spurred into action by a “faltering economic outlook”.
However, the labour market remains tight while services inflation, widely seen as a more accurate gauge of domestic price pressures, actually accelerated in August.
“Domestic inflation remains high as wages are still rising at an elevated pace,” the ECB said.
Path for interest rates
Speaking last month, Philip Lane, the ECB’s chief economist, said there had been “good progress” on inflation, but cautioned that the return to target is “not yet secure”.
Traders expect at least one more cut this year, likely in December, with the benchmark rate likely to fall to around 2.0 per cent by mid-next year.
The ECB did not give any guidance on the likely rate path, suggesting it will take a “data-dependent and meeting-by-meeting approach”. But Neil Birrell, chief investment officer at Premier Milton, said the ECB would be “looking ahead to the prospects for growth rather than over their shoulder at inflation”.
Both the Fed and the Bank of England will announce their latest rate decisions next week, with investors expecting the Fed to cut for the first time since the pandemic. The Bank, meanwhile, is expected to hold.