The European Central Bank has reduced key interest rates by 25 basis points, as anticipated on Thursday, as policymakers determined that the disinflation process is progressing as expected, but expressed growing concerns about the health of the euro area economy in light of some weaker economic data released since the September policy meeting.
The Governing Council, chaired by ECB President Christine Lagarde, decreased the deposit facility rate by a quarter percentage point to 3.25 percent following the rate-setting meeting held in Ljubljana, Slovenia’s capital.
“…the choice to diminish the deposit facility rate – the mechanism through which the Governing Council directs the monetary policy stance – is grounded in its revised evaluation of the inflation outlook, the evolution of underlying inflation, and the efficacy of monetary policy transmission,” the ECB stated.
The central bank for the eurozone had previously reduced rates by the same amount in September and was anticipated to implement another cut only in December.
Nevertheless, economic data following the September meeting intensified expectations for a near-term reduction. Although headline inflation has considerably decreased, the core inflation figure has not declined as swiftly as the bank desires.
Additionally, a growing number of indicators, such as those from the purchasing managers’ survey and bank lending statistics, have begun to indicate a downturn in the Eurozone economy, a concern acknowledged in the policy announcement. ECB policymakers are also starting to express doubts about the durability of the labor market.
Lagarde conveyed her concerns regarding the recent economic data while engaging with reporters during the post-decision press conference. She noted that the decision to lower rates was unanimous.
The ECB president explicitly refrained from committing to a rate cut in December, emphasizing instead a data-dependent approach. In response to a query, she indicated that the ECB has not yet fully “broken the neck of inflation.” The bank remains focused on achieving a soft landing, Lagarde stated.
Policymakers will be presented with the latest set of ECB staff macroeconomic projections in December.
This time, the ECB maintained its forward guidance on interest rates.
Policy rates will remain sufficiently restrictive for as long as necessary to steer euro area inflation back to the 2 percent target, as stated by the ECB.
“The Governing Council will continue to adhere to a data-dependent and meeting-by-meeting approach to evaluate the appropriate level and duration of restrictions,” the bank declared.
“The Governing Council is not pre-committing to a specific rate trajectory,” the bank reiterated.
ING economist Carsten Brzeski noted that the decision to cut rates just five weeks after the previous reduction, with very few economic data points available since then, suggests that the ECB is increasingly worried about the eurozone’s growth prospects and the risk of inflation falling below the target.
This latest rate cut may indicate that the ECB is now eager to adjust interest rates to a more neutral level, the economist added.
Capital Economics economist Jack Allen-Reynolds mentioned that data released in the upcoming weeks will likely support 25 basis points rate cuts at each of the next few meetings, at the very least.
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