The European Central Bank decided on Thursday, October 17, to further reduce its official rates, reassured by inflation that had fallen to the lowest level in three years in the euro area, where what is now considered worrying is growth. This new reduction of 0.25 percentage points raises the deposit rate, which serves as a reference for credit conditions in the economy, to 3.25%.
The disinflation process “it’s on the way”driven by a slow economy, say in a press release the twenty-five members of the Council of Governors gathered in Ljubljana, capital of Slovenia, for this off-site annual meeting.
With this second consecutive monetary easing, after a similar decision in September, they adopt the opposite attitude to the caution shown a month ago: then they gave the impression of wanting to wait until December to loosen the monetary screw again. But since then, developments in consumer prices have reassured supporters of rate cuts: inflation in the euro area even slowed more than expected in September, to 1.7% in a year, versus to an initial estimate of 1.8%, Eurostat announced on Thursday.
Reactivation of consumption and investment
At the same time, worrying signals have accumulated for the European economy, encouraging a reduction in rates to reactivate consumption and investment. Even advocates of stricter monetary orthodoxy had in recent weeks been open to further easing. “Growth is even weaker than the ECB’s forecasts revised downwards in September, while inflation returns to target more quickly” than expected, Deutsche Bank analysts noted.
In September, for the first time in more than three years, inflation fell below the 2% threshold, the objective set by the Frankfurt monetary institution. Additionally, core inflation, a widely followed indicator that excludes volatile energy and food prices, fell to 2.7% year-on-year. “The evolution of inflation is part of the good news”German central bank chief Joachim Nagel commented this month.
On the bad news side, Germany, once the locomotive of European growth, is now expecting another recession this year. The German government has just revised its growth forecasts downward, expecting a 0.2% drop in GDP this year in Europe’s largest economy, after a 0.3% contraction in 2023.
In the euro zone, private sector activity contracted in September for the first time in seven months, weighed down by the end of the effect of the Olympic Games in France.
Thursday’s fall will not be “not the last”The governor of the Bank of France, François Villeroy de Galhau, had anticipated at the beginning of October. However, the Governing Council did not commit on Thursday to continue monetary easing, which will be based “about data” economic.
