FRANKFURT, Sept 12 (Askume) – The European Central Bank cut interest rates again on Thursday and said borrowing costs “will fall” in the coming months as inflation slows and euro zone economic growth remains sluggish.
The European Central Bank cut its deposit rate by 25 basis points to 3.50%, following a similar rate cut in June as inflation is now close to the 2% target and the domestic economy has fallen into recession.
The move has been widely announced, with investors keeping an eye on what happens next and how the ECB’s decision will be affected by the Federal Reserve’s rate cuts starting next week.
“Our path, its direction, is very clear, the path of easing tensions is not gradual or quantitatively predetermined,” ECB President Christine Lagarde said at a press conference.
Without a significant deterioration in economic growth prospects, the European Central Bank is unlikely to cut interest rates further at its next meeting in October, sources told Askume after the meeting .
Euro zone central bankers are more likely to wait for their December meeting, when they will have more data and a fresh round of economic forecasts, the sources said.
Analysts also said there was little new data to support an October rate cut.
“We believe the ECB will cut rates on a quarterly basis this year — gradually rather than swiftly,” said BlackRock’s Ann-Caitlin Peterson.
“Only a more severe deterioration in the economy would prompt the ECB to make continued or deeper interest rate cuts.”
Lagarde did not provide much information at the press conference but reiterated that the ECB follows a “data-dependent” and meeting-by-meeting policy approach without any pre-commitments.
New forecast
He painted a mixed picture for euro zone inflation, driven by rising wages while overall labour cost pressures have eased and been absorbed by businesses.
He said inflation remains a big concern for the services sector, but wage growth is slowing and corporate profits are increasingly absorbing wage increases.
Lagarde warned that wage growth this year would remain high and volatile, given some of the recent high-profile pay deals.
More dovish ECB policymakers, mainly from the southern euro zone, believe the risk of recession is rising and that high interest rates are now restricting economic growth more than necessary, increasing the risk that the inflation target cannot be achieved.
But hardliners, who are in the majority, say the labour market is still too hot for the ECB to remain silent, while underlying price pressures caused by stubborn service costs raise the risk that inflation could spike again.
New economic forecasts do little to settle the debate.
Quarterly forecasts from ECB staff show that this year’s growth will be slightly lower than forecast in June, while inflation is still expected to reach 2% in the second half of 2025.
This means the debate is likely to be about how quickly the ECB should ease policy, rather than whether it should ease at all.
Hawkish policymakers have made clear they believe a quarterly rate cut is appropriate because key growth and wages indicators – which inform the ECB’s forecasts – are compiled every three months.
Investors are also divided, with financial markets expecting interest rates to be cut again before December, but the probability of interim action in October appears to be just 30%.
Technical interest rate cut
With Thursday’s move, the European Central Bank’s deposit rate fell by 25 basis points to 3.5%. However, the long-term technical adjustment in the refinancing rate resulted in a massive reduction of 60 basis points to 3.65%.
The difference between the two rates has been fixed at 50 basis points since September 2019, when the European Central Bank injected stimulus into the economy to avert the threat of deflation.
In March , the central bank announced plans to narrow the corridor to 15 basis points at a meeting on Thursday to restart the interbank lending process.
This recovery will take many years, so the ECB’s move is a pre-emptive adjustment to its operating framework.
Currently, banks have 3 trillion euros of excess liquidity, which they deposit with the ECB overnight, effectively making the deposit rate their main policy tool.
Liquidity will diminish over time, forcing banks to borrow again from the ECB at refinancing rates, which have traditionally been a benchmark for borrowing costs.
Once this happens, key rates will regain their dominant position, and a narrower interest rate corridor will help the ECB better manage market rates.
