At European Central Bank (ECB) is starting to worry more about the economic slowdown in the euro zone than about a new inflationary surge, which is why it has decided to accelerate the fall in the price of silver. The institution headed by Christine Lagarde executed this Thursday the third interest rate cut since June (and the second in a row after a break in July), worth a quarter of a point, to place in the 3.25% the rate applicable to the deposit facilitywhich now guides the direction of monetary policy.
This new rate cut is will be felt first by a reduction in real estate loans and creditseven if the banks have already largely underestimated it because the ECB has been emphasizing it for weeks. Brussels also hopes that the fall in the price of silver will contribute to boosting anemic economic activity in the eurozone.
“The latest inflation information shows that the disinflation process is continuing as expected. The inflation outlook is also affected by recent downward surprises in economic activity indicators. At the same time, financing conditions remain restrictive,” reads the statement approved at the end of the Governing Council meeting.
With the quarter-point reduction approved this Thursday, the interest rate applicable to the main financing operations remains at 3.4%, while the marginal credit facility (what banks pay for overnight funding) falls to 3.65%. Analysts expect a further reduction at the next meeting in Decemberwith the aim of reducing rates to 2% in June 2025.
In its statement, the Governing Council insists that when deciding on rates it “will continue to apply a data-driven approach, in which Decisions are made meeting by meetingto determine the appropriate level of restriction and its duration.”
The ECB decided to step on the accelerator by reducing rates after verifying that inflation is now below the 2% targetwhich corresponds to the definition of price stability. Eurostat confirmed on Thursday that the euro zone CPI fell by five tenths in September due to the sharp fall in energy prices, to reach 1.7%.
For its part, core inflation – which excludes energy, food, alcohol and tobacco, the most volatile elements – is falling much more slowly, going from 2.8% in August to 2. 7% in September. It’s a key structural indicator for the ECB when deciding interest rates.
Lagarde has already announced that the CPI will increase slightly in the last months of the year (mainly due to the step effect from the previous year), but still expects it to converge sustainably towards the 2% target throughout 2025.
“Inflation is expected to rise in the coming months and then decline toward target over the next year. Domestic inflation remains high as wages continue to rise at a high rate. Cost pressures labor costs continue to gradually attenuate, in a context in which the benefits partially cushion their impact on inflation”, indicates the ECB press release.
For his part, the growth of the euro zone slowed slightly by 0.3% recorded during the first quarter of the year up to 0.2% between April and June, approaching a point of stagnation. Germany, which traditionally plays a driving role, is now a drag with a drop of 0.1%. Furthermore, economic activity in the Eurozone contracted unexpectedly in September.
The ECB considers the economic outlook for the euro zone “worrying”with risks to growth oriented downwards. The long-awaited consumer-led recovery has so far failed to materialize. Investment remains weak and, although the labor market remains resilient, demand for labor is slowing.
Central bankers consider that “dAs inflation approaches the target, real economic activity should become more relevant for calibrating monetary policy“, as stated in the minutes of the penultimate meeting of the Governing Council published on October 10.
