ECB cuts rates again as Lagarde talks down inflation threat

For the third time this year, the European Central Bank (ECB) has voted to lower its key interest rate, signaling that policymakers no longer viewed inflation as the eurozone’s biggest threat.
On Oct. 17, policymakers voted to reduce the benchmark rate by 0.25% to 3.25%, in a move that was widely expected by investors.
In justifying the decision, the central bank’s governing council said the process of disinflation was “well on track,” adding that, “The inflation outlook is also affected by recent downside surprises in indicators of economic activity.”
As Creditnews reported, ECB President Christine Lagarde already laid the groundwork for a rate cut in early October when she said that inflationary pressures had moderated significantly in recent months.
Her comments were in response to a bigger-than-expected drop in the eurozone Consumer Price Index (CPI), which reached a more than three-year low of 1.8% in September.
Nevertheless, Lagarde cautioned at the time that the disinflation process would be bumpy, and she reiterated this on Thursday.
“Have we broken the neck of inflation? Not yet. Are we in the process of breaking that neck? Yes,” said Lagarde.
According to Bloomberg economy reporter William Horobin, the ECB’s decision shows that it’s “not blind” to economic data. It’s also a strong indicator that policymakers are turning their attention to reviving a slumping regional economy.
Eurozone needs growth
While the eurozone economy is showing some signs of life thanks to stronger factory output and improving investor morale, ECB Executive Board member Isabel Schnabel says the region is “stagnating.”
In a recent speech, Schnabel blamed “exceptional shocks,” such as the pandemic and Russia’s invasion of Ukraine, for the region’s ongoing struggles.
The ECB’s sharp response to inflation by raising interest rates also held back growth and investment, said Schnabel.
The policymaker also blamed the region’s poor performance on Finland, Estonia, and Germany—countries that have lagged behind the rest of the pack this year.
As Creditnews reported, Germany is quietly bracing for another recession this year due to weak demand and a lack of investment. The country’s Economy Ministry expects GDP to contract by 0.2% in 2024.
As Germany goes, so does the rest of Europe. According to European Union data, Germany accounts for nearly a quarter of the EU’s total GDP.
Despite Germany’s struggles, there are some positive signs that lower interest rates are beginning to percolate throughout the economy. After hovering above zero all year, bank lending is finally recovering.
“For the first time since the third quarter of 2022, banks reported a moderate net increase in demand from firms for loans or drawing of credit lines, while remaining weak overall,” the ECB reported in its quarterly survey of large banks.
“Net demand for housing loans rebounded strongly,” the central bank concluded.
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