Why the ECB is cutting rates: Balancing slow growth and inflation concerns

Main restaurants

• The European Central Bank (ECB) took a cautious approach, cutting interest rates due to slow growth and the first signs of declining inflation, but realizing that the struggle against the inflation over.
• The ECB reaffirmed its commitment to data-based decision-making and maintaining flexibility in its policies.
• The central bank remains committed to reducing inflation to 2 percent and continues to closely monitor data to adjust policy accordingly.

As European Central Bank (ECB) decided to cut interest rates by another 25 basis points in October. This was the third interest rate cut in a row.

The reasons for the reduction

Falling inflation
Although energy prices fell significantly, contributing to lower inflation in September, this in itself was not enough to justify a rate cut. However, there were early signs of improvement in services inflation (the main driver of core inflation).

Slowing economic growth
Recent indicators have pointed to a weakening of economic activity. The ECB acknowledged this, but said it was largely due to structural factors rather than cyclical demand, which is more sensitive to the effects of monetary policy.

Risk management
The central bank saw the risk that if the slowdown in economic activity and inflation is temporary, waiting until December could lead to the need to cut interest rates further. She chose a protective measure to limit this risk

Considerations against immediate reduction

Inflation remains above target
Although there are signs of improvement, domestic inflation remains well above the ECB’s 2 percent target.

Early stages of deflation
The main slowdown in services inflation and wage growth has yet to materialize.

Looking forward

The ECB remains committed to reducing inflation to 2 percent. The data will be closely monitored to adjust policy accordingly, with the ECB still “data dependent”.
The ECB also wants to maintain flexibility to respond to changing economic conditions.

He chose a cautious approach, cutting interest rates due to slow growth and the first signs that inflation was declining, but the ECB recognized that the fight against inflation is not over.
The ECB confirmed that it is committed to data-based decision-making and that it wants to keep its policies flexible.

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