ECB cuts rates of interest to three.5% because it warns of weaker eurozone development

The European Central Bank cut interest rates again today in response to easing inflation and faltering economic output. 

The ECB followed its June cut with a 25 basis point reduction in its key deposit rate to 3.5 per cent, in a strongly telegraphed move that was followed by a slight downgrade to the bank’s projections for the eurozone economy.

It now expects it will grow by just 0.8 per cent in 2024, followed by an expansion of 1.3 and 1.5 per cent in 2025 and 2026 respectively.

Eurozone growth has slowed this year as successive ECB interest rate hikes have taken effect, while consumer price inflation across the bloc has eased from 4.3 per cent in September last year to 2.2 per cent as of last month.

Money markets are keeping an eye on ECB President Christine Lagarde’s comments for clues on the direction of interest rates when she is due to speak later today 

The ECB expects headline inflation to come in at 2.5, 2.2 and 1.9 per cent for 2024, 2025 and 2026 respectively, unchanged from its last projections in June.

Prior to the decision, markets had been pricing another two more 25bps cuts to 3 per cent by the end of the year.

The ECB’s commentary offered little clues as to future policy direction but stressed that decisions will be taken meeting by meeting.

It cautioned that ‘domestic inflation remains high’, but noted ‘labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation’.

Money markets are keeping an eye on ECB President Christine Lagarde’s comments for clues on the direction of interest rates when she is due to speak later today 

Michael Field, European market strategist at Morningstar, said: ‘The macroeconomic data since the June rate cut has been supportive of the ECB’s actions. 

‘Inflation has fluctuated but it has ultimately fallen to a level very close to the central bank’s target, while economic growth has remained positive, but benign.

‘The risk of the economy overheating because of further rate cuts appears low, making economists’ expectations of one more rate cut before the end of the year highly probable. The ECB’s pattern of cut, monitor, and repeat is likely to continue.’

ECB cuts its main deposit rate to 3.5 per cent 

What next for interest rates?

Next week the Bank of England and the US Federal Reserve will also make decisions on the direction of interest rates.

A sharp fall in oil prices suggests markets think global inflationary pressures are unlikely to resurface and central banks can continue easing monetary policy.

The Fed is expected to cut its main rate by 25bps or 50bps after data showed US inflation dropped from 2.9 per cent in July to 2.5 per cent in August, beating forecasts.

Markets are much less confident the BoE will follow suit, despite disappointing economic growth figures earlier this week.

Traders are currently pricing two more BoE cuts of 25bps each by the of this year, taking base rate from its current level of 5 per cent to 4.5 per cent. 

However, the cuts are expected to come in the bank’s November and December meetings.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘Even though economic growth is clearly flagging, partly as high interest rates take their toll, policymakers still look set to be wary, and keep rates on hold.

‘Although the once red-hot labour market is well on the way to cooling down, with regular pay growth (excluding bonuses) falling to 5.1 per cent, it still might be weeks rather than days before borrowing costs come down.

‘The rate of wage increases is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on as higher prices for goods and services.’

‘A lot is likely to be riding on August’s CPI number, due out just a day before the big interest rate decision.’