ECB cuts interest rates for third time this year

The European Central Bank (ECB) announced today that it has lowered its key interest rates by 25 basis points (bps) following its October policy meeting, marking the third rate cut this year.

This widely expected move brings the ECB’s interest rate on main refinancing operations to 3.40%, the marginal lending facility rate to 3.65%, and the deposit facility rate to 3.25%, effective from October 23, 2024.

This series of rate cuts is part of the ECB’s broader efforts to address the eurozone’s shifting inflation dynamics. In a statement, the central bank noted, “The decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.”

The ECB’s actions come as inflation in the eurozone dipped to 1.7% in September, down from 2.2% in August, marking the first time inflation has fallen below the ECB’s 2% target in three years. The decline was driven mainly by falling energy prices. However, core inflation, which excludes energy and food prices, remains more persistent at 2.7%. Services inflation is also proving difficult to control, still running at 3.9% year-on-year.

Despite the headline inflation rate dipping below target, the ECB remains cautious. “Inflation is expected to rise in the coming months before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace,” the ECB stated. The central bank also emphasized that labour cost pressures are gradually easing, though profits are helping to buffer some of these inflationary impacts.

Economists are closely watching the ECB’s next steps. Mark Taheny, Managing Director at corporate finance advisory firm Centrus, noted, “This marks the ECB’s third rate cut this year and the second in a row, a streak of action not seen in recent memory. With inflation dipping below the 2% target in September, analysts were correct in their prediction that the ECB would move ahead with the cut, citing weak economic growth and a cooling labour market as further signs of the need for monetary easing.

“The decision has sent ripples through European markets and all eyes are now on the central bank’s next move!”

The ECB has reiterated its commitment to ensuring that inflation returns to its 2% medium-term target. The bank stated that it will maintain sufficiently restrictive monetary policy “for as long as necessary” to achieve this goal, and will continue to follow a data-dependent approach for future rate decisions.

Financial markets reacted to the announcement with cautious optimism, as investors now await further economic data that may influence the ECB’s upcoming policy decisions. While the eurozone’s inflationary outlook appears to be improving, analysts expect inflation to hover around 2% for the remainder of 2024, with the potential for slight overshooting in the near term.