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The European Central Bank has cut interest rates by a quarter percentage point to 3.5 per cent in response to falling Eurozone inflation and signs that the bloc’s economy risks grinding to a halt.
Thursday’s decision to lower the ECB’s benchmark deposit rate for the second time this year comes as the US Federal Reserve is expected to start cutting borrowing costs next week.
Major central banks have begun lowering rates in response to indications that the biggest rise in inflation for a generation has faded. Some analysts think the ECB is likely to cut rates again at both its remaining meetings this year.
Eurozone inflation slowed in August to a three-year low of 2.2 per cent, down from 2.6 per cent in July. Falling industrial output in Germany and Italy has also raised concerns that the Eurozone economy is slowing after a brief period of growth earlier this year.
“Labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation,” the ECB said on Thursday. “Financing conditions remain restrictive, and economic activity is still subdued, reflecting weak private consumption and investment.”
In new quarterly projections, the ECB estimated growth of 0.8 per cent this year — down marginally on June’s 0.9 per cent forecast. It similarly reduced its estimate for 2025 from 1.4 per cent to 1.3 per cent, citing “a weaker contribution from domestic demand over the next few quarters”.
The central bank kept its inflation forecast for this year at 2.5 per cent and for next year at 2.2 per cent.
The euro held steady at $1.101 after the decision, while interest-rate sensitive two-year German Bund yields, a benchmark for Eurozone borrowing costs, also stayed at 2.18 per cent, up 0.05 percentage points on the day.
This is a developing story
