ECB cuts interest rates to 3.5%

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The European Central Bank has cut interest rates by a quarter percentage point to 3.5 per cent in response to falling Eurozone inflation and signs that the bloc’s economy risks grinding to a halt.

Thursday’s decision to lower the ECB’s benchmark deposit rate for the second time this year comes as the US Federal Reserve is expected to start cutting borrowing costs next week.

Major central banks have begun lowering rates in response to indications that the biggest rise in inflation for a generation has faded. Some analysts think the ECB is likely to cut rates again at both its remaining meetings this year.

ECB president Christine Lagarde said Thursday’s move was “unanimously decided” — unlike the previous cut in June, when Austria’s central bank head Robert Holzmann dissented.

Referring to the ECB’s 2 per cent inflation goal, Lagarde said recent data “comforts us in our confidence that we are heading towards our target”.

Eurozone inflation slowed in August to a three-year low of 2.2 per cent, down from 2.6 per cent in July. Falling industrial output in Germany and Italy has also raised concerns that the Eurozone economy is slowing after a brief period of growth earlier this year.

“Labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation,” the ECB said on Thursday. “Financing conditions remain restrictive, and economic activity is still subdued, reflecting weak private consumption and investment.”

In new quarterly projections, the ECB estimated growth of 0.8 per cent this year — down marginally on June’s 0.9 per cent forecast. It similarly lowered its estimate for 2025 from 1.4 per cent to 1.3 per cent, citing “a weaker contribution from domestic demand over the next few quarters”.

The central bank kept its inflation forecast for this year at 2.5 per cent and for next year at 2.2 per cent.

“If there is a worry, it seems to be about slowing demand,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “Given that, the risk is tilted towards more and faster rate cuts later this year.”

But Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB would “probably leave rates on hold until December before cutting again”.

The euro rose 0.2 per cent to $1.103 after the decision, while interest-rate sensitive two-year German Bund yields, a benchmark for Eurozone borrowing costs, were unchanged at 2.18 per cent, up 0.05 percentage points on the day.

The ECB also set out details of a move to prepare for when commercial banks may need to borrow more from it.

It will reduce the difference between how much it charges for lending to such banks and how much it pays them for keeping funds with it, from 0.5 percentage points to 0.15 points.

But Ducrozet said the change was unlikely to have “any material impact in the near term” since banks still have extensive liquidity, diminishing their need to borrow from the ECB.