European Central Bank lowers rates once more as inflation subsides and the bloc’s economy shows signs of stagnation

The European Central Bank (ECB) implemented its third interest rate cut of the year on Thursday, lowering the deposit rate by 25 basis points to 3.25%. This marks the first consecutive rate cut in 13 years, signaling a notable shift in the ECB’s focus from solely controlling inflation to also addressing the eurozone’s sluggish economy. The decision reflects growing confidence that inflation is becoming more manageable, alongside a worsening economic outlook, as recent data shows weaker-than-expected inflation and declining business activity.

The ECB emphasized that the disinflationary trend is progressing, backed by economic indicators that have consistently underperformed, likely influencing the decision to cut rates. The eurozone economy has been lagging behind the United States for the past two years, and the ECB now seems to prioritize economic growth, which has been slowing.

While the ECB did not provide specific guidance on future rate cuts, markets are already pricing in the likelihood of three more reductions by March 2024. However, the central bank maintained its data-driven approach, stressing that decisions will be made on a meeting-by-meeting basis, and rates will remain restrictive as long as necessary to keep inflation in check.

Following the rate cut, the euro extended its decline, reflecting market expectations of ongoing pressure on the currency due to the ECB’s dovish stance and the weaker economic outlook in the region.