The European Central Bank (ECB) has implemented another interest rate cut to counter the growing threat of a eurozone economic slowdown. This marks the first consecutive rate cut by the ECB since the euro crisis in 2011, as inflation continues to fall across the 20-member currency union and business activity shows signs of flagging.
In its latest move, the ECB lowered its key deposit rate by 0.25 percentage points to 3.25%. This follows a similar reduction in September and reflects the central bank’s concern about weakening economic conditions, particularly in Germany, where a recession looms.
ECB President Christine Lagarde emphasized that the unexpectedly sharp drop in inflation necessitated further action to avoid a hard landing for the eurozone economy. Inflation across the bloc decreased to 1.7% in September, down from 2.2% the previous month, underscoring the need for stimulus.
Eurozone Economic Struggles
Lagarde pointed to a range of economic indicators showing a widespread slowdown in the eurozone. Business activity in France is expected to soften after a temporary boost during the Paris Olympics, while Italy’s recovery from the recent inflation shock has lost momentum. Germany, Europe’s largest economy, remains under significant strain, with only Spain showing some resilience, recording 0.8% growth in the second quarter.
Manufacturing data for the eurozone paints a bleak picture, with the HCOB Manufacturing PMI falling to a nine-month low in September, continuing a two-year downturn. Lagarde confirmed that the ECB will remain data-driven in its decision-making, avoiding any promises of further rate cuts before its December meeting.
Global Response and Financial Markets
The ECB’s move puts it ahead of other major central banks in terms of cutting rates. The Bank of England is expected to follow with a 0.25% reduction in November, while the U.S. Federal Reserve has signaled further cuts after its initial half-point reduction last month.
Financial markets responded to the ECB’s decision, with gold reaching an all-time high of $2,688.82 per ounce, as investors anticipated rate cuts and economic uncertainty in the run-up to the U.S. election.
In a statement, the ECB justified its decision, noting: “The disinflationary process is well on track, and the recent downside surprises in economic activity indicators suggest further weakness in the real economy.
The ECB's focus now shifts to encouraging consumer spending and investment across the eurozone, aiming to stimulate the economy and avoid a prolonged downturn.
