The European Central Bank (ECB) cut interest rates for the third time this year, signalling that there will be further easing in the months ahead.
The decision means the main interest rate was reduced by 25 basis points to 3.25 per cent, down from a peak of four per cent which was reached last September.
“The incoming information on inflation shows that the disinflationary process is well on track,” it said in a statement accompanying the decision.
“The inflation outlook is also affected by recent downside surprises in indicators of economic activity. Meanwhile, financing conditions remain restrictive.”
Investors widely anticipated the rate cut despite signals at the ECB’s last meeting that it would take a gradual approach to cutting rates.
Mark Wall, chief European economist at Deutsche Bank, said that the decision likely represented a “pivot point” towards faster rate cuts.
Policymakers were prompted to cut rates at back-to-back meetings, given further signs of progress on inflation.
Revised figures showed that inflation across the eurozone fell to 1.7 per cent in September, down from 2.2 per cent in August and its lowest level since April 2021.
Services inflation, which policymakers have identified as a key gauge of domestic price pressures, fell to 3.9 per cent from 4.1 per cent the month before.
The ECB noted that inflation is expected to rise over the remainder of the year, but would likely return to target next year.
Although domestic inflation remains high due to rising wages, the ECB noted that cost pressures would “continue easing gradually” while profit margins were “buffering their impact on inflation”.
Higher interest rates hit the European economy
Economic activity, meanwhile, has continued to undershoot expectations, particularly in Germany, which has shown signs of persistent weakness.
In a report on Monday, the German economic ministry said: “The weak economic phase is likely to continue in the second half of 2024 before growth momentum gradually picks up again in the coming year”.
The ECB’s latest economic forecasts, published last month, suggest that the eurozone will grow just 0.8 per cent this year.
This would likely leave the bloc trailing the UK and put it a long way behind the US.
Joe Nellis, an economic advisor at MHA, pointed out that the ECB has a dual mandate to foster growth as well as control inflation.
“ECB policymakers will hope that this cut provides a boost to the German (and wider Eurozone) economy, inspiring consumer spending, encouraging investment, and ultimately stimulating the economy,” Nellis said.
The ECB said it would continue to follow a “data-dependent and meeting-by-meeting approach” over the coming months. Markets expect rates to settle around two per cent.