The European Central Bank (ECB) on Thursday reduced the benchmark interest rate from 3.5% to 3.25% following data indicating that inflation across the region had dropped to its lowest point in over three years. In September, inflation fell to 1.8%, dipping below the ECB‘s 2% target for the first time in three years.
This is the third rate cut announced by the ECB since July after its governing council meeting in Slovenia’s Llubljana instead of its usual location in Frankfurt, Germany.
Inflation has been declining faster than expected, and analysts anticipate that the bank will further reduce rates in December. The eurozone’s meager growth of just 0.3% in the second quarter has only reinforced the belief that ECB President Christine Lagarde will not attempt to alter this expectation.
“The trends in the real economy and inflation support the case for lower rates,” said Holger Schmieding, chief economist at Berenberg Bank.
One factor contributing to the global decrease in inflation is that central banks significantly raised borrowing costs from near-zero levels during the COVID-19 pandemic when prices began to surge, initially due to supply chain issues and later as a result of Russia’s full-scale invasion of Ukraine, which drove up energy prices.
The ECB, established in 1999 with the introduction of the euro currency, started increasing interest rates in the summer of 2021, reaching a record high of 4% in September 2023 to control inflation by making borrowing more expensive for businesses and consumers. However, this has come at the expense of weighing on economic growth.
