European Central Bank Reduces Interest Rates Once More Due to Weakening Economy
The back-to-back rate reduction is the first that the eurozone’s central bank has made in 13 years.
Policymakers at the European Central Bank (ECB) have cut interest rates for the third time this year, signaling that inflation in the eurozone is sufficiently under control as attention turns to a deteriorating economic outlook for the region.
“The disinflationary process is well on track,” she said, adding that the ECB is “determined to ensure that inflation returns to our 2 percent medium-term target in a timely manner” and that the central bank will keep policy rates sufficiently restrictive “for as long as necessary” to hit the inflation target.
Prices in the eurozone grew by 1.7 percent year over year in September, falling below the 2 percent target for the first time in three years. Even though Lagarde said the ECB expects inflation to edge above its target by the end of the year, she generally highlighted fading inflationary pressures, particularly in the area of labor costs.
While Lagarde emphasized the inflationary outlook rather than growth concerns as the key factor behind the rate-cut decision, she did note “recent downside surprises” in economic activity indicators. This includes “particularly volatile” industrial production over the summer months, along with factory surveys that point to continued contraction in manufacturing.
Related Stories
Even though service activity indicators in the eurozone inched higher in August, Lagarde said this likely reflected a temporary bump from a strong tourism season, adding that more recent data point to “more sluggish growth.” Housing investment in the region has also continued to fall, businesses have slowed their investment, exports have weakened, and households have consumed less.
Even though recent surveys indicate slowing employment growth and further decline in labor demand in the eurozone, Lagarde cited data pointing to labor market resilience, including an unemployment rate that held steady at a historical low of 6.4 percent.
“We expect the economy to strengthen over time, as rising real incomes allow households to consume more,” she said. “The gradually fading effects of restrictive monetary policy should support consumption and investment.”
While Lagarde refrained from forecasting future rate moves, saying that the central bank’s decisions would be based on incoming data, some analysts speculated that more rate cuts are incoming.
Analysts at ING said that Lagarde’s remarks suggest that the ECB is “aiming to bring interest rates to neutral levels as quickly as possible,” given the concerns about growth.
The ECB’s rate cut is part of a broader global trend. Seven of the 10 major developed-market central banks have initiated easing cycles. Some, like the Swiss National Bank and Sweden’s Riksbank, have cut rates aggressively to address slowing economic growth. Last month, the U.S. Federal Reserve cut its benchmark interest rate by 50 basis points, the first such reduction in over four years.
European stocks responded positively to the ECB’s move. The pan-European STOXX 600 index closed 0.8 percent higher, edging closer to record highs. Germany’s DAX reached an all-time high, underscoring buoyant sentiment among investors despite the subdued economic outlook.
Not all central banks are in easing mode, however. Norway and Australia remain in a hawkish tilt, with no immediate cuts on the horizon.
