The European Central Bank (ECB), which sets interest rates for the 20 countries that use the euro currency, cut borrowing costs once again yesterday after figures showed inflation across the bloc falling to its lowest level in more than three years and economic growth waning.
The bank’s rate-setting council lowered its benchmark rate from 3.5 percent to 3.25 percent at a meeting in Llubljana, Slovenia, rather than its usual Frankfurt, Germany, headquarters.
The rate cut is its third since June and shows optimism among rate-setters over the path of inflation. Inflation sank to 1.8 percent last month, the first time in three years that it has been below the ECB’s target rate of 2 percent.
Photo: Petar Santini, Bloomberg
In a statement accompanying the decision, the ECB said recent economic evidence shows that “the disinflationary process is well on track.” However, it predicted an inflation pick-up in the coming months, before a return to its target in the course of next year.
ECB President Christine Lagarde gave few signals that the bank would be cutting interest rates again at the next policy meeting in December.
“The governing council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” she said at a press briefing after the decision. “In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation.”
Lagarde did acknowledge that the recent data had come in “somewhat weaker than expected,” pointing to a contraction in manufacturing sector and weaker exports.
Risks to eurozone economic growth are “tilted to the downside,” Lagarde said. “Lower confidence could prevent consumption and investment from recovering as fast as expected,” she said, while also warning of “geopolitical risk” from the conflicts in Ukraine and the Middle East.
Economists think mounting evidence of an economic slowdown in the eurozone will pile pressure on rate-setters to consider another cut as faltering growth could also cool prices.
“The trends in the real economy and inflation support the case for lower rates,” Berenberg Bank chief economist Holger Schmieding said.
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