With inflation subsiding, the European Central Bank (ECB) yesterday cut interest rates again to prop up tepid growth with lower borrowing costs for companies and home buyers.
The US Federal Reserve likely would not far behind in joining the rate-cutting process.
The ECB’s rate-setting council lowered the deposit rate from 3.75 percent to 3.5 percent at a meeting at its headquarters in Frankfurt, Germany.
Photo: Reuters
It was the second rate cut as the bank starts to withdraw some of the swift rate increases it imposed to snuff out a burst of double-digit inflation that broke out after Russia cut off most natural gas supplies over its invasion of Ukraine.
With the help of lower oil prices, inflation in the 20 countries that use the euro fell to 2.2 percent last month, not far from the ECB’s 2 percent target, down from 10.6 percent at its peak in October 2022.
At her post-decision news conference, ECB President Christine Lagarde said that recent data had confirmed “our confidence that we are heading towards our target in a timely manner.”
However, she steered clear of any guidance on further cuts.
She said the bank would make rate decisions on a meeting-by-meeting basis depending on incoming information about the economy and was “not pre-committing to a particular rate path.”
Policymakers must keep an eye on simmering inflation among services companies and rising wages as workers push to make up for purchasing power lost to the outburst of inflation that followed the end of the COVID-19 pandemic, Lagarde said.
The ECB cut once in June and then hit pause in July before going on summer break last month. The rate-setting council led by Lagarde has to juggle concerns about a disappointing outlook for growth — which argues for cuts — against the need to make sure inflation is going to reach the bank’s 2 percent target and stay there — which would support keeping rates higher for a bit longer.
The ECB’s benchmark rate strongly influences what private-sector banks pay to borrow — and through that rates across the rest of the economy. Higher rates cool inflation by making it more expensive to borrow and buy things, holding back price rises. However, high rates can slow growth, and that worry is coming into focus.
Europe’s growth has been sluggish, at 0.3 percent in the second quarter of this year and a roughly 1.0 percent annual rate based on performance in the first half. That follows more than a year of near-zero stagnation.
Hopes for a more robust pickup have been dampened by recent indicators of business and consumer sentiment, and by a stream of bad news from the eurozone’s biggest economy, Germany.
Across the Atlantic, the Fed is also expected to make a first cut in its benchmark rate at its meeting on Tuesday and Wednesday next week from a 23-year high of 5.25 to 5.5 percent.
US consumer prices rose 2.5 percent last month from a year earlier, down from 2.9 percent in July, government data showed on Wednesday. It was the fifth straight annual drop in inflation.
Core inflation excluding volatile fuel and food — which can be a better guide — was higher at 3.2 percent.
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