The European Central Bank (ECB) announced a reduction in interest rates during its October meeting on Thursday, marking the third consecutive cut since June. The new interest rates are set at 3.40% for main refinancing operations, 3.65% for the marginal lending facility, and 3.25% for the deposit facility.
The main refinancing rate, which banks pay to borrow money from the ECB for one week, has seen a decrease of 25 basis points. The marginal lending facility rate is the cost for banks borrowing from the central bank overnight, while the deposit facility rate is the interest received by banks for overnight deposits with the ECB. In a statement, the ECB explained that the decision to lower rates was based on an updated assessment of the inflation outlook and the dynamics of underlying inflation.
“The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity,” the ECB noted. Policymakers convened in Ljubljana, Slovenia, for this month’s meeting, deviating from the usual location in Frankfurt.
The rate cut comes as inflation in the eurozone fell to a revised 1.7% in September, down from 2.2% in August, marking the first time it has dipped below the ECB’s 2% target in three years. The decline was largely driven by falling energy prices; however, core inflation, which excludes volatile energy and food prices, remained relatively high at 2.7%, down slightly from 2.8%. Services inflation also continues to be a concern, running at 3.9% year-on-year.
Despite the positive trend in headline inflation, economists predict it may hover around the 2% target for the remainder of 2024, with a possibility of slightly overshooting the mark. ECB President Christine Lagarde expressed confidence that inflation would return to target in a timely manner, acknowledging that the ECB would consider recent developments in their policy decisions.
The ECB’s decision to cut borrowing costs is also a response to signs of stagnation in the eurozone economy. The growth rate was revised downward to 0.2% for the second quarter of 2024, reflecting lower-than-expected private consumption and investment, despite a positive contribution from net trade. The ECB projects third-quarter growth to remain at 0.2%, with annual growth estimates revised down from 0.9% to 0.8%. For 2025, forecasts have been downgraded from 1.4% to 1.3%.
The HCOB Eurozone Composite PMI, which surveys manufacturing and services sectors, slipped below the 50-point threshold in September, indicating a contraction in private sector activity. Germany, the largest economy in the eurozone, is particularly struggling, with predictions of a 0.2% shrinkage in 2024, following a 0.3% contraction in 2023.
This latest rate cut from the ECB follows a 50-basis-point reduction by the U.S. Federal Reserve last month, marking its first rate cut since early 2020.
