European Central Bank cuts rates again as inflation continues to ease and bloc’s economy stagnates

The European Central Bank (ECB) made its third interest rate cut of the year on Thursday, lowering the deposit rate by 25 basis points to 3.25%. This marks the first consecutive rate cut in 13 years and signals a significant shift in the ECB’s priorities, moving from a strict focus on controlling inflation to supporting the struggling eurozone economy. The ECB’s decision reflects the growing confidence that inflation is becoming more manageable, as well as a deteriorating economic outlook, with recent data pointing to lower-than-expected inflation and weak business activity.

The ECB’s statement highlighted that the disinflationary process is progressing, supported by economic indicators that have come in below expectations, which likely influenced the decision. The eurozone economy has underperformed relative to the United States for the past two years, and the ECB now appears to be placing more emphasis on economic growth, which has been slowing.

Although the ECB didn’t provide explicit guidance on future rate cuts, markets are already pricing in the likelihood of three more reductions by March 2024. However, the central bank reiterated its data-dependent approach, stating that policy decisions will be made meeting by meeting and that rates will remain restrictive as long as needed to ensure inflation is kept under control.

In response to the decision, the euro fell further, reflecting market expectations of continued pressure on the currency due to the more dovish stance of the ECB and the weaker economic outlook in the eurozone.