ECB cuts interest rates to 3.5% as growth slows

Frankfurt — The European Central Bank (ECB) cut interest rates again on Thursday as inflation slows and economic growth in the eurozone falters, but gave few clues to its next step, even as investors bet on steady policy easing in the months ahead.

The ECB lowered its deposit rate by 25 basis points (bps) to 3.5%, following up on a similar cut in June as inflation is now within striking distance of its 2% target and the domestic economy is skirting a recession.

The US Federal Reserve is expected to start to its own rate cuts next week. 

The central bank of the 20 countries that share the euro gave little away. “Our path, of which the direction is pretty obvious — a declining path — is not predetermined, neither in terms of sequence nor in terms of volume,” ECB president Christine Lagarde told a press conference.

She repeated the bank’s standard formula for a “data-dependent”, meeting-by-meeting approach to policy with no precommitments.

Euro assets were little changed, as analysts interpreted the ECB’s approach as cautious. With just five weeks until the next policy meeting, they said there may be little new data to support an October cut.

“We think the ECB will stick to a quarterly pace of cuts this year — dancing the waltz rather than a quickstep,” BlackRock’s Ann-Katrin Petersen said.

“Only a further sharp economic deterioration would prompt the ECB to speed up with back-to-back or larger cuts.”

New forecasts

Lagarde painted a mixed picture of inflation in the eurozone continuing to be sustained by rising wages even as overall labour cost pressures moderated and were absorbed by companies.

She said services sector inflation remained a major worry but that wage growth is moderating and corporate profits are absorbing rapid wage increases.

Lagarde warned that negotiated wage growth will remain high and volatile this year in light of some high profile pay deals struck recently.

More dovish ECB policymakers, mainly from the bloc’s south, have been arguing that recession risks are rising and high interest rates are now restricting growth more than needed, raising the risk that inflation could undershoot the target.

But hawks, who are still in a majority, say the labour market remains too hot for the ECB to sit back, and that underlying price pressures, as evidenced in stubborn services costs, raise the risk inflation could surge again.

New economic forecasts did little to settle the debate.

Quarterly projections from the ECB’s staff showed growth this year will be slightly lower than forecast in June while inflation is still seen reaching 2% in the second half of 2025.

That means the argument is likely to be how quickly, not if, the ECB should ease policy.

Hawkish policymakers have made clear that they see quarterly rate cuts as appropriate, since key growth and wage indicators — which inform the ECB's projections — are compiled every three months.

Investors are also divided, with another cut by December fully priced into financial markets but the chance of an interim move in October seen only at 30%.

Reuters