The European Central Bank, which sets interest rates for the 20 countries that use the euro, cut borrowing costs again on Thursday after figures showed inflation across the bloc fell to its lowest level in more than three years and economic growth eased.
The bank’s interest rate-setting board lowered its benchmark interest rate from 3.5% to 3.25% at a meeting in Ljubljana, Slovenia, instead of its usual headquarters in Frankfurt, Germany.
The rate cut is the third since June and shows optimism among rate setters about the path of inflation. Inflation fell to 1.8% in September, the first time in three years that inflation was below the European Central Bank’s target rate of 2%.
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In a statement accompanying the decision, the ECB said recent economic evidence shows that “the disinflation process is on the right track.” However, the bank expects inflation to rise in the coming months, before returning to its target over the next year.
Although the bank has not indicated that it will cut interest rates again at its next meeting in December, analysts believe that growing evidence of an economic slowdown in the euro zone will prompt it to do so. All eyes will be on European Central Bank President Christine Lagarde at her press conference later on Thursday.
“Trends in the real economy and inflation support the case for lower interest rates,” said Holger Schmieding, chief economist at Berenberg Bank.
One reason inflation has been so low around the world – down 2.4% in the US and 1.7% in the UK – is that central banks dramatically increased borrowing costs from almost zero during the coronavirus pandemic when prices started to rise, first as a precaution. . As a result of supply chain problems that then accumulated due to the large-scale Russian invasion of Ukraine in early 2022, which led to higher energy costs.
The European Central Bank, created in 1999 when the euro was born, began raising interest rates in the summer of 2021, reaching a record high of 4% in September 2023 to control inflation by making it more expensive. For businesses and consumers to borrow, but that came at a cost by affecting growth.
Other central banks, such as the US Federal Reserve, have also begun cutting interest rates as inflation rates decline.
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