ECB decides to cut interest rates for second consecutive term in response to economic stagnation
This is the first consecutive rate cut in 13 years.
Recent economic indicators support the case for ECB rate cuts
High interest rates are having a negative impact on investment and economic growth
Markets are almost fully pricing in three more rate cuts by March
Written by Francesco Canepa and Balazs Colanyi
FRANKFURT (Reuters) – The European Central Bank is likely to cut interest rates again on Thursday, insisting that inflation in the euro zone is now becoming increasingly subdued and the economy is stagnant.
The first consecutive interest rate cuts in 13 years signal a shift in the eurozone central bank’s focus from curbing inflation to protecting economic growth, which has lagged far behind the United States for the second year in a row.
The latest economic data has likely tipped the balance within the ECB in favor of rate cuts, with business activity, sentiment surveys and September inflation all coming in slightly below expectations.
Following the announcement, a number of ECB speakers, including President Christine Lagarde, warned that new borrowing cost cuts were likely to occur this month, with investors completely discounting the move.
“Trends in the real economy and inflation support the case for lower interest rates,” Berenberg economist Holger Schmieding said.
Thursday’s quarter-point cut would reduce the interest rate the ECB pays on bank deposits to 3.25%, with money markets almost fully pricing in three further cuts by March 2025.
Lagarde and others are unlikely to drop any concrete hints about future moves on Thursday, repeating their theory that decisions will be made “meeting by meeting” based on incoming data.
However, most ECB watchers believe that each Governing Council has decided to cut interest rates.
“This is an implicit signal that unless the statistics improve, further rate cuts are very likely in December,” said Paul Hollingsworth, an economist at BNP Paribas.
inflation and growth
The ECB can finally claim that it has largely contained the worst inflation in a generation.
Last month’s price increase was just 1.8%. Inflation could rise slightly above the ECB’s 2% target by the end of this year, but is expected to remain around that level or slightly lower for the foreseeable future.
But the economy had to pay a high price for it.
High interest rates have supported investment and economic growth, which has been stagnant for nearly two years. The latest data on industrial production and bank lending point to more of the same in the coming months.
Cracks are beginning to appear in what has been a highly resilient labor market, with vacancy rates, or the share of vacancies in total jobs, falling from record highs.
This has led to growing calls within the ECB to ease policy before it is too late.
Mario Centeno, head of Portugal’s central bank, recently said: “We are facing new risks. Inflation could fall below target and economic growth could be constrained.” “Lower jobs and reduced investment will only add to the already entrenched ratio of sacrifices.”
The problem is that some of its weaknesses stem from structural problems such as high energy costs and low competitiveness that hold back Germany, Europe’s industrial powerhouse.
These cannot be solved by lower interest rates alone, although cheaper capital can help margins.
“We cannot ignore the headwinds to growth,” said ECB board member Isabel Schnabel. “At the same time, monetary policy cannot solve structural problems.”
Report by Francesco Canepa. Editing: Emelia Sithole-Matarise
