The European Central Bank (ECB) is expected to announce its second straight interest rate cut on Thursday, as inflation in the euro zone cools and economic growth remains stagnant. This marks the first back-to-back rate reduction in 13 years, shifting the ECB's focus from tackling inflation to supporting an economy that has underperformed the United States for the past two years.
The latest economic data, including weaker business activity and inflation slightly below expectations in September, has tilted the ECB toward easing monetary policy. A quarter-point cut would bring the rate on bank deposits down to 3.25%, with three additional cuts anticipated through March 2025.
While ECB President Christine Lagarde and her colleagues are unlikely to give clear signals about future rate cuts, many analysts believe further reductions are likely in December unless economic data significantly improves.
Inflation, which grew by 1.8% last month, is now largely under control, but the euro zone economy has paid a steep price. High interest rates have hindered investment and growth, which has been stagnant for nearly two years. Recent data on industrial output and bank lending points to continued weakness in the coming months, and even the once-robust labor market is showing signs of strain.
ECB board member Isabel Schnabel acknowledged that while lower rates can help mitigate growth challenges, they cannot solve structural issues like high energy costs and low competitiveness, particularly in Germany.
With inflation nearing the ECB’s 2% target, the central bank now faces the risk of undershooting its goal, potentially leading to fewer jobs and reduced investment, according to Portuguese central banker Mario Centeno. As a result, many ECB officials are calling for policy easing before these risks escalate further.
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