The European Central Bank (ECB) decreased key interest rates by 25 basis points on Thursday, aligning with expectations. This decision follows an assessment that the disinflation process is progressing, yet there is a growing apprehension about the euro area's economic health due to recent weaker-than-anticipated data, released post the September policy session. The Governing Council, under the leadership of ECB President Christine Lagarde, reduced the deposit facility rate—a crucial tool for steering the ECB’s monetary policy stance—by a quarter basis point to 3.25 percent during the session held in Ljubljana, Slovenia's capital.
The ECB stated, "The decision to lower the deposit facility rate is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission."
Earlier, in September, the bank implemented a similar rate cut and was largely anticipated to issue another reduction in December. However, new economic data emerging since the September session bolstered predictions for a sooner rate cut. Although headline inflation has considerably slowed, core inflation figures have not decreased at the desired pace.
Moreover, various indicators, including the purchasing managers' survey and bank lending data, signal a weakening Eurozone economy, a fact the ECB acknowledged in its policy statement. Policymakers have also begun to express skepticism about the labor market’s resilience.
During the post-decision press conference, Lagarde acknowledged concerns about recent economic data. She confirmed that the decision to lower rates was unanimous. While she avoided committing to a December rate cut, she emphasized a data-driven approach. Addressing a question, Lagarde noted that the ECB has not yet fully "broken the neck of inflation" and anticipates a soft landing.
December will equip policymakers with a new set of macroeconomic projections from the ECB staff. The forward guidance on interest rates remains unchanged, maintaining that policy rates will stay sufficiently restrictive to bring euro area inflation back to the 2 percent target. The ECB stated, "The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction."
Despite not committing to a specific rate path, ING economist Carsten Brzeski remarked that the decision to slash rates mere weeks after the previous reduction, with minimal economic data available, signifies increased ECB concern about the eurozone's growth prospects and potential inflation below target. Brzeski suggested that the latest cut indicates urgency in positioning interest rates at a more neutral level.
Additionally, Capital Economics economist Jack Allen-Reynolds anticipated that forthcoming data would likely justify 25 basis points rate cuts at each of the upcoming meetings, at minimum.
