The European Central Bank warned that euro zone economic growth would be weaker than expected and cut interest rates for the second time this year.
The ECB Governing Council decided on Thursday to cut the deposit rate paid to banks making overnight deposits into the Eurosystem by 0.25 percentage points to 3.5% from 3.75%.
The move was expected as euro zone inflation fell to 2.2% in August from 2.6% in July, closer to the ECB’s 2% target.
In a sign of Europe’s slowing economic recovery, the ECB lowered its GDP growth forecast for this year to 0.8% from 0.9%, and for 2025 to 1.3% from 1.4%, and for 2026 to 1.5% from 1.6%.
The ECB said it had lowered borrowing costs because “inflation is gradually declining and developing in line with expectations.”
Central bank economists expect inflation to pick up in the second half of the year and then fall in 2025 and 2026, “with wages still rising at a high pace.”
Thursday’s cut follows a 0.25 percentage point cut in June in the deposit rate, which the ECB raised to a record 4% in response to surging inflation across Europe in 2022 and 2023.
The ECB was cautious about whether to cut rates again at its next meeting in October. “We are not committed in advance to a particular interest rate path. We will decide at each meeting. We have not made any kind of commitment about specific dates and our path is not pre-determined at all,” President Christine Lagarde told reporters in Frankfurt.
She said a slowdown in the German economy, which is currently on the brink of recession, had been included in the ECB’s latest growth forecasts.
Kathleen Brooks, research director at XTB, said financial markets were expecting further rate cuts from the ECB this year.
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“The problem for the ECB is that financial markets don’t seem to realise that the ECB has not yet made up its mind about the future of monetary policy,” Brooks said. “Interest rate futures markets are still pricing in a 60 basis point cut for the rest of the year, with further cuts expected in October and December.”
Investors expect the US Federal Reserve to cut interest rates by a quarter of a percentage point next week, beginning monetary easing. The Bank of England also meets next week, but a second cut in UK interest rates is expected to be postponed until November.
