The European Central Bank (ECB) has announced a 25 basis point reduction in its key interest rates, lowering the deposit rate to 3.5%. This marks the second rate cut of the year and comes in response to cooling inflation and concerns about economic growth in the eurozone.ECB President Christine Lagarde stated, ‘Based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to take another step in moderating the degree of monetary policy restriction’. The ECB’s decision was widely anticipated by market analysts, reflecting the ongoing efforts to balance inflation control with economic stimulus.The central bank has revised its economic growth forecasts downward, now projecting eurozone growth of 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026. Despite these reductions, the ECB maintains its inflation projections, expecting inflation to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026.This rate cut is expected to have a positive impact on the eurozone economy by lowering borrowing costs for businesses and households. However, savers may face lower returns on their investments, including products like life insurance.The ECB’s decision comes as inflation in the eurozone has slowed to 2.2% in August, approaching the bank’s medium-term target of 2%. However, Lagarde cautioned that inflation is expected to rise again in the latter part of this year, partly due to base effects from previous energy price declines.Looking ahead, the ECB has emphasized its commitment to a data-dependent approach, with Lagarde stating, ‘We will continue to follow a data-dependent approach and take decisions at each meeting, to determine the appropriate level of policy tightening and its duration’. This stance leaves open the possibility of further rate adjustments based on economic developments in the eurozone.
Key points
- The ECB has cut its key interest rate by 25 basis points to 3.
- The decision aims to stimulate economic growth while managing inflation, which has cooled to 2.
- ECB has revised down growth forecasts but maintained inflation projections.
- Future monetary policy decisions will remain data-dependent, according to ECB President Christine Lagarde.
5%, the second reduction this year.
2% in August.
