By hannover-web.com During the European Central Bank’s (ECB) meeting on October 17, a decision was made to cut interest rates for the third time, lowering all major rates by 25 basis points, in line with market expectations. This move aims to support a struggling economy as inflation continues to approach the 2% target.
ECB President Christine Lagarde highlighted that while price increases are “following a predetermined path,” there remains uncertainty regarding the timing and pace of future rate cuts. She noted that the economy has shown unexpectedly weak performance, and that future rate adjustments will depend on economic data.
The ECB has reduced the key deposit rate to 3.25%, the main refinancing rate to 3.40%, and the marginal lending rate to 3.65%. In a post-meeting statement, the ECB mentioned that this rate cut was based on the latest inflation outlook, underlying inflation momentum, and the strength of the monetary policy transmission mechanism. Recent data indicates that the decline in inflation is proceeding smoothly, although economic indicators have unexpectedly dropped recently. Additionally, financial conditions continue to exert pressure on the economy.
The ECB anticipates that inflation will rise in the coming months but expects it to fall back toward the target by next year. Internal inflation remains high due to rapid wage growth, though labor cost pressures are expected to gradually ease. Lagarde emphasized that the ECB will maintain sufficiently restrictive policy rates as needed to achieve the 2% inflation goal. The committee will continue to follow a “data-dependent” approach, making decisions on appropriate interest rates and the duration of tightening without a predetermined path for rate cuts.
In the subsequent press conference, Lagarde noted that economic activity has been weaker than anticipated, with ongoing contraction in the manufacturing sector and sluggish growth in services. Investment by businesses has been slow, and residential investment continues to decline. Exports, particularly of goods, have softened, leading to a continued downside risk for economic growth.
However, she expects the economy to strengthen over time, as rising real incomes will boost household consumption, and easing monetary policies will support both consumption and investment. A rebound in exports is also foreseen with an uptick in global demand. Lagarde indicated that inflation might increase in the coming months, partly due to the expiration of low energy price comparisons and heightened geopolitical tensions, predicting it will only return to the 2% mark next year.
The ECB’s acceleration of rate cuts was partly prompted by the release of the final September inflation figure, which was revised down from 1.8% to 1.7%, marking the first time since 2021 that inflation has dipped below the 2% target. Compounding the situation, weakening private economic activity and signs of strain in the previously robust labor market have also raised concerns.
Furthermore, escalating conflicts in the Middle East and potential tariff increases if Donald Trump were to regain the presidency pose additional risks to the eurozone economy. Decision-makers are closely monitoring actions by the U.S. Federal Reserve as well.
Even among “hawkish” policymakers, there is recognition of the increased economic risks. Executive Board member Isabel Schnabel stated that officials “cannot ignore the headwinds to economic growth.” A Bloomberg survey of economists reflected these concerns, with many downgrading their forecasts for the third and fourth quarters of this year as well as for next year, predicting that the deposit rate will soon fall to a range of 2% to 2.5%, aligning with “neutral rate” levels.
