Policymakers at the European Central Bank (ECB) have cut interest rates for the third time this year, indicating that inflation in the eurozone is under control as concerns grow about the region’s economic outlook.
The ECB announced on October 17 that it had reduced rates by 25 basis points, bringing the deposit rate down to 3.25 percent. This marks the first consecutive rate reduction made by the eurozone’s central bank in 13 years, reflecting a shift from combating inflation to addressing economic stagnation.
Following the rate-cut decision, ECB President Christine Lagarde stated during a speech that while inflationary pressures are diminishing, the central bank remains watchful and ready to act if those pressures resurface. Lagarde emphasized that disinflation is progressing well and expressed determination to ensure that inflation returns to their target of 2 percent in a timely manner. She also mentioned that policy rates will remain sufficiently restrictive for as long as necessary to achieve this goal.
In September, prices in the eurozone grew by 1.7 percent year over year, falling below their target of 2 percent for the first time in three years. Lagarde acknowledged expectations of inflation surpassing their target by year-end but highlighted fading inflationary pressures, particularly regarding labor costs.
Although Lagarde focused on inflation rather than growth concerns when explaining their decision to cut rates, she did acknowledge recent negative surprises in economic activity indicators. These include volatile industrial production during summer months and continued contraction in manufacturing based on factory surveys.
Lagarde noted a slight increase in service activity indicators for August but attributed it mainly to temporary effects from a strong tourism season. More recent data suggests slower growth overall with declining housing investment, reduced business investment and exports weakening while households consume less.
Despite surveys indicating slowing employment growth and declining labor demand within the eurozone, Lagarde cited data showing resilience within labor markets such as an unemployment rate holding steady at a historical low of 6.4 percent.
While refraining from predicting future rate moves based on incoming data determining decisions instead some analysts speculate further rate cuts are likely due to negative momentum within Europe’s economy.
The ECB’s governing council stated that despite this cut they still consider their current reference interest rate of 3.25 percent restrictive according to ING analysts who believe Lagarde’s remarks indicate an aim towards reaching neutral interest levels quickly given growth concerns.
This move by ECB aligns with broader global trends where seven out of ten major developed-market central banks have initiated easing cycles including aggressive cuts made by Swiss National Bank and Sweden’s Riksbank due to slowing economic growth; last month U.S Federal Reserve also reduced its benchmark interest rate by fifty basis points marking its first such reduction since four years ago.
European stocks responded positively following ECB’s announcement with pan-European STOXX600 index closing higher at around point eight percent nearing record highs; Germany’s DAX reached all-time high highlighting investor optimism despite subdued economic outlooks.
However not all central banks are adopting easing measures; Norway and Australia remain hawkish without immediate plans for cuts.