ECB Cuts Rates to 3.5% Amid Slowing Inflation and Weak Growth

The European Central Bank (ECB) has cut interest rates again, continuing its efforts to combat slowing inflation and sluggish economic growth in the Eurozone.

On September 12, 2024, the ECB reduced its key deposit rate by 25 basis points to 3.5%, marking the second rate cut this year​​.

Reasons for the Rate Cut

The ECB’s decision comes amid clear signs of economic weakness and a sharp decline in inflation. Eurozone inflation fell to 2.2% in August, its lowest level in three years, close to the ECB’s long-term target of 2%​​. Additionally, economic activity remains sluggish, with private consumption and investment particularly weak. The central bank now projects GDP growth of just 0.8% for 2024, down from an earlier estimate of 0.9%​​.

“Staff project that the economy will grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. This is a slight downward revision compared with the June projections, mainly owing to a weaker contribution from domestic demand over the next few quarters,” the ECB said in a statement.

Several factors contributed to this challenging economic environment. Germany, the Eurozone’s largest economy, has seen an unexpected contraction in output, and Italy has reported declining industrial production​​. Meanwhile, wage growth, which had driven price increases in the services sector, is beginning to ease, providing some relief to inflationary pressures​.

The ECB’s latest forecasts show inflation stabilizing at 2.5% for 2024, with a gradual decline to 2.2% in 2025 and 1.9% in 2026​. However, core inflation, which excludes volatile items like food and energy, is expected to drop more slowly due to persistent wage pressures in the services sector​.

While the ECB expects inflation to rise slightly toward the end of 2024, driven by changes in energy prices, the overall outlook for inflation suggests a gradual return to the 2% target​.

Future Rate Decisions

The ECB has signaled that it will continue to follow a data-dependent approach to future monetary policy decisions, making adjustments based on evolving economic conditions​. While further rate cuts are expected, the central bank has refrained from committing to a specific rate path, indicating that each decision will be made on a meeting-by-meeting basis​​.

The ECB’s latest moves align with a broader global trend of central banks easing monetary policy as inflation cools and economies slow. The US Federal Reserve is also expected to reduce rates when it next meets Sept. 17-18.

Market Reactions

Following the ECB’s announcement, the euro remained relatively stable against the US dollar, and interest-rate-sensitive government bond yields showed little movement​​. Markets are now pricing in the possibility of another ECB rate cut by the end of 2024, with some analysts predicting as many as two more reductions before the year ends​​. According to Bloomberg, analysts “see cuts each quarter until September 2025.”

In conclusion, the ECB’s latest rate cut reflects the central bank’s ongoing struggle to balance slowing inflation with a faltering economic recovery. While the bank remains committed to bringing inflation back to target, concerns over weak growth may influence the pace and timing of further monetary easing.