ECB cuts interest rates by 0.25% as expected and provides no signals on next steps

The European Central Bank cut interest rates by 25 basis points to 3.50%, in a widely expected decision.

The second rate cut since June suggests that the ECB entered easing cycle, although the central bank did not provide any significant signal about their next steps.

Markets, on the other hand, expect the EU policymakers to continue easing its monetary policy in coming months, in overall favorable environment, as inflation continues to slow and is near 2% target, while high borrowing cost obstructs economic growth.

Lack of signals from the ECB about the action in the near future was not a surprise, despite many economists and market participants expected hints about continuation of policy easing and whether the widely expected Fed rate cut next week will prompt ECB’s further cuts.

Instead, President Lagarde, in her post-policy meeting press conference, repeated known phrases that the policymakers are not pre-committing a rate path, with coming monetary policy decisions to remain data dependent and made on meeting to meeting base, leaving markets without substantial information.

Most analysts expected such outcome, arguing that ECB will remain very cautious with monetary policy adjustments and needs to have detailed information before making a final decision.

The ECB policymakers are divided on monetary policy, with those more dovish, arguing that inflation is almost at desired level with risk of undershooting the target, while high interest rates continue to restrict economic growth and raise risk of recession.

Hawks in the central bank are in majority and continue to point to persisting risk of fresh rise in inflation and oppose the idea of stronger policy easing for now.