LONDON – The European Central Bank, which sets interest rates for the 20 countries that use the euro currency, cut borrowing costs once again on Thursday after figures showed inflation across the bloc falling to its lowest level in more than three years and economic growth waning.
The bank’s rate-setting council lowered its benchmark rate from 3.5% to 3.25% at a meeting in Llubljana, Slovenia, rather than its usual Frankfurt, Germany, headquarters.
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The rate cut is its third since June and shows optimism among rate-setters over the path of inflation. Inflation sank to 1.8% in September, the first time in three years that it has been below the ECB’s target rate of 2%.
In a statement accompanying the decision, the ECB said recent economic evidence shows that “the disinflationary process is well on track.” However, it predicted an inflation pick-up in the coming months, before a return to its target in the course of next year.
ECB President Christine Lagarde gave few signals that the bank would be cutting interest rates again at the next policy meeting in December.
"The governing council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction," she said at a press briefing after the decision. “In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation.”
Lagarde did acknowledge that the recent data had come in “somewhat weaker than expected,” pointing to a contraction in manufacturing sector and weaker exports.
Economists think mounting evidence of an economic slowdown in the eurozone will pile pressure on rate-setters to consider another cut as faltering growth could also cool prices.
“The trends in the real economy and inflation support the case for lower rates,” said Holger Schmieding, chief economist at Berenberg Bank.
The ECB, which was created in 1999 when the euro currency was born, started raising interest rates in the summer of 2021, taking them up to a r ecord high of 4% in Sept. 2023 to get a grip on inflation by making it more expensive for businesses and consumers to borrow, but that has come at a cost by weighing on growth.
One reason why inflation has fallen around the world — it's down at 2.4% in the U.S. and 1.7% in the U.K. — is that central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of Russia’s full-scale invasion of Ukraine in early 2022, which pushed up energy costs.
Other central banks, such as the U.S. Federal Reserve, have also started to cut interest rates as inflation rates have fallen.