The European Central Bank is gearing up to lower interest rates once again as inflation in the eurozone dips below target levels. The bank, responsible for setting interest rates for the 20 countries that use the euro currency, is expected to make the move after recent data revealed that inflation in the region has dropped to its lowest point in over three years while economic growth is slowing down.
The rate-setting council of the European Central Bank is anticipated to reduce the benchmark rate from 3.5% to 3.25% at an upcoming meeting, which is set to take place in Ljubljana, Slovenia, instead of the bank’s usual headquarters in Frankfurt, Germany. If implemented, this rate cut would mark the third such reduction since June.
In September, inflation in the eurozone stood at 1.8%, falling below the ECB’s target of 2% for the first time in over three years. Analysts predict that the bank will continue to lower rates in December given the sluggish economic growth in the region, which was only at 0.3% in the second quarter. This has reinforced expectations that ECB President Christine Lagarde will support further rate cuts.
Holger Schmieding, the chief economist at Berenberg Bank, highlighted, “The trends in the real economy and inflation support the case for lower rates.” The global trend of falling inflation is attributed to central banks worldwide increasing borrowing costs from near-zero levels during the COVID-19 pandemic to counter rising prices initially due to supply chain disruptions and later due to the impact of Russia’s invasion of Ukraine, driving up energy prices.
The European Central Bank had hiked interest rates starting in the summer of 2021, raising them to a record high of 4% in September 2023 to tackle inflation by making borrowing more costly for businesses and consumers. However, this move has weighed on economic growth.
As the ECB prepares for another possible rate cut, the financial markets are closely watching the developments to gauge the impact on the broader European economy.