The European Central Bank (ECB) has announced its third interest rate cut this year, marking a significant move in response to a deteriorating economic outlook in the eurozone.
The decision, made on Thursday, highlights the central bank’s shift in priorities from fighting inflation to fostering economic growth, which has lagged behind the US over the past two years.
In a statement, the ECB noted that disinflation was progressing well, as inflation data revealed that eurozone prices rose by just 1.7% in September—the first time in three years that they fell below the 2% target.
That being said, the inflation outlook remains concerning, with high wages continuing to contribute to domestic inflation pressures. The ECB confirmed that the quarter percentage point cut now adjusts the deposit rate to 3.25%.
This development is part of the ECB’s broader strategy, which will now focus on supporting economic growth that has been adversely affected by higher interest rates and reduced investment.
The latest data indicates that the economy is weakening: business activity surveys and manufacturing indicators have fallen short of expectations, raising the possibility of a further slowdown.
As borrowing costs decrease, this is anticipated to stimulate investment activity. However, it's crucial to recognize that rate cuts are not a universal remedy for the structural issues plaguing the eurozone economy. High energy costs and low competitiveness, especially in Germany’s industrial sector, continue to pose significant challenges.
Isabel Schnabel, a member of the ECB’s governing board, emphasized that monetary policy cannot address all structural issues, necessitating a comprehensive approach.
Market expectations indicate a potential for further rate cuts to just above 2% over the next year, which could offer additional stimulus for both businesses and consumers.
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