The European Central Bank cut interest rates on Thursday for the third time this year, saying inflation in the euro zone was increasingly under control while the outlook for the broader economy was worsening.
The first consecutive rate cut in 13 years marks a shift in focus for the ECB from reducing inflation to protecting economic growth, which has lagged far behind that of the United States for two years in a row.
“We believe that the disinflationary process is on the right track and all the information we received in the last five weeks was in the same direction: downward,” said ECB President Christine Lagarde at a press conference following a statement from the organization that also pointed out “recent downward surprises” in economic activity.
That data is likely to have tipped the balance within the ECB in favor of a rate cut, as surveys on business activity and confidence, as well as September’s inflation reading, came in slightly lower than expected.
Asked about the possibility of higher tariffs on European goods if Donald Trump wins next month’s US presidential election, Lagarde said any trade obstacles were a “negative effect” for Europe.
“Any restriction, any uncertainty, any obstacle to trade is important for an economy like the European one, which is very open,” he said, adding that the ECB was also “very attentive” to possible movements in oil prices related to the Middle East conflict.
However, he added that “we certainly don’t see a recession. We’re still looking at that soft landing.”
The quarter-point cut reduces the rate the ECB pays on bank deposits to 3.25 percent. Money markets are almost fully pricing in three additional reductions through next March.
The ECB did not provide any indication on future measures in its statement, instead repeating its mantra that decisions will be made “meeting by meeting” based on incoming data.
Inflation and growth
The ECB can finally claim to have virtually mastered the worst episode of inflation in at least a generation.
Prices rose just 1.7 percent last month, falling below the bank’s 2 percent target for the first time in three years. Although inflation may exceed 2 percent later this year, it is expected to hover around that level for the foreseeable future.
The ECB noted that wage increases continue to support “domestic inflation”, that is, the growth in the price of services and goods that do not depend much on imports, but that this was also declining.
“Domestic inflation remains high, as wages continue to rise at a high rate. At the same time, pressures on labor costs will continue to gradually decline, and profits will partially cushion their impact on inflation,” the ECB added.
However, the economy has had to pay a high price for this.
High interest rates have undermined investment and economic growth, which has been weak for almost two years. The most recent data, including industrial production and bank lending, suggest that the same will continue in the coming months.
The resilient labor market is also starting to show some cracks, with the vacancy rate, or the share of vacant jobs as a percentage of the total, falling from record highs.
This has fueled calls within the ECB to ease monetary policy before it is too late.
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