The European Central Bank cut interest rates again on Thursday as inflation eases and economic growth slows, but gave no indication of its next move, despite investors betting on continued monetary easing in the coming months.
The European Central Bank cut its deposit rate by 25 basis points to 3.50%, in a widely expected move, following a similar cut in June after inflation fell within striking distance of the bank’s 2% target and the economy was on the brink of recession.
Investors’ attention has already shifted to the next steps, but the central bank has not indicated this, sticking to making decisions at the time without prior commitment to a specific path for monetary policy.
“The Governing Council will continue to take a data-driven approach and make decisions at each meeting to determine the appropriate level of tightening and the duration of its implementation,” the bank said in a statement. “The Governing Council will not commit itself in advance to a particular path of monetary policy.”
At her press conference in Frankfurt on Thursday after the decision, European Central Bank President Christine Lagarde said, “We will remain data-driven,” adding that Thursday’s decision was unanimous, and that “this is particularly justified in light of the prevailing uncertainty.”
Like its global peers, the European Central Bank has become more confident that consumer price growth is back on target after hitting a historic high. Meanwhile, the 20-nation eurozone economy is losing steam. Households are failing to sustain the recovery that began earlier in the year and manufacturers remain in the doldrums due to weak demand from outside the eurozone.
This weakness prompted the European Central Bank to cut its GDP forecasts for 2024, 2025 and 2026, now seeing growth this year of 0.8% compared to 0.9% in the last round of quarterly forecasts. Inflation expectations remained broadly unchanged.
“The recovery faces some headwinds,” Lagarde said, stressing that risks remain tilted to the downside and that gradual monetary policy will support consumption and investment.
On inflation, she said wage progress would remain high and volatile, although overall growth in labor costs was moderate.
All eyes on the US Federal Reserve
The ECB’s decisions come less than a week before widespread expectations that the US Federal Reserve will begin easing US monetary policy.
Two days ago, former European Central Bank President Mario Draghi warned that Europe’s slow growth could continue for a long time to come. In a long-awaited report, he offered a set of remedies, though his most expensive recommendations were immediately rejected by Germany.
