ECB accelerates rate cuts to counteract flagging growth
Summary
The European Central Bank lowered interest rates for the second meeting in a row, speeding the pace of rate cuts to support an economy flashing increasing signs of weakness.
The Decision
The European Central Bank lowered interest rates for the second meeting in a row, speeding the pace of rate cuts to support an economy flashing increasing signs of weakness. The ECB said it would reduce its key interest rate to 3.25% from 3.5%. That widens a gap in benchmark borrowing costs with the Federal Reserve.
The Key Point
The ECB is now more worried about supporting growth than snuffing out inflation, making cuts at consecutive meetings for just the first time since 2011. Thursday’s statement cited “recent downside surprises in indicators of economic activity."
The Context
Europe faces a different set of problems from the U.S., where growth is strong. The eurozone economy appears to have fallen back over the summer after a brief pickup in the first half of the year.
Germany, the bloc’s biggest economy, has barely grown since before the pandemic. And signals for the next few months don’t look good. The composite purchasing managers index for the eurozone, a closely watched survey of private businesses, dipped into contractionary territory last month for the first time since February. Weaker growth in China, a key export destination, and persistently higher energy prices sparked by the Ukraine war have hammered consumers and businesses.
Headline inflation, at 1.7% last month, is below the ECB’s 2% target. Any wariness about the growth outlook from ECB President Christine Lagarde, who will address a news conference starting at 8:45 a.m. ET, could indicate that the bank is preparing to ease faster than investors are expecting.
The ECB said in a statement that incoming data shows the disinflationary process is well on track.
What’s Next
The ECB said it would continue to determine interest rates meeting by meeting based on incoming economic data, indicating a lack of certainty about exactly how bad things are. It wants to wait and see before committing to further cuts, though markets expect the ECB to lower interest rates again at its next meeting in December, to 3%.
There is less consensus about 2025. Investors are currently pricing rates bottoming out just below 2% in the second half of next year, but some economists say 2.5% is more likely if wages and core inflation don’t weaken further.
“The persistent weakness in growth supports our assessment that the ECB went too far by raising the deposit rate to 4%…We now see a risk that, upon cutting rates, the ECB may make the reverse mistake and ease policy too much," said Holger Schmieding, chief economist at Berenberg Bank.
Write to Tom Fairless at tom.fairless@wsj.com
