ECB cuts interest rates again as focus shifts to stagnant economy

The ECB delivers another rate cut in anticipation of stagnant eurozone growth for the rest of the year
By Sam Bourgi
•
13 September 2024
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Following months of uncertainty, the European Central Bank (ECB) made its second interest rate cut in five years to revive a stagnant economy.

On Thursday, the ECB's Governing Council cut its benchmark interest rate by 0.25% to 3.50%, matching the reduction made in June.

“The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” ECB chair Christine Lagarde said in a statement.

However, Lagarde stressed that policymakers are “not pre-committing to a particular rate path.”

Policymakers acknowledged that “domestic inflation remains high” due to elevated wages. Service inflation—which is growing at more than double the rate of the ECB’s 2% target—is another source of concern.

Nevertheless, cutting interest rates is a measured risk the ECB is willing to take to boost a stagnant economy.

According to the central bank’s latest forecasts, eurozone growth is expected to sputter at around 0.8% this year, down from a previous projection of 0.9%.

The revision came less than a week after the European Union’s statistics agency said second-quarter growth was even weaker than previously reported.

Depending on how bad things get, central bankers could be under added pressure to bring borrowing costs even lower in the coming months.

More rate cuts expected

Economists have pegged December as the next likely target for rate cuts. Anything before that could be a sign that policymakers are panicking.

Investors “should not expect three rate cuts into the end of the year,” said Tressis’ chief economist Daniel Lacalle, referring to three consecutive reductions in September, October, and December.

In other words, Lacalle believes the ECB will skip rate cuts at its October meeting. “If they actually implemented three rate cuts into December, I would be very worried,” said Lacalle.

The ECB isn’t the only central bank under pressure to act decisively in the face of a weakening economy.

Across the pond, the Federal Reserve is widely expected to lower interest rates multiple times this year, beginning with its meeting next week.

Although the ECB claims its policy is independent of the Fed, research firm Pantheon Macroeconomics suggests that the start of Fed easing could prompt further ECB rate cuts.

As Vanguard economist Jumana Saleheen noted, policy divergence between the ECB and the Fed has limited European policymakers’ options.

ECB Governing Council member Robert Holzmann seconds this view. Earlier this year, he said the ECB couldn't lower rates scott-free while the Fed stands pat.

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