ECB Cuts Rates by 25bps as Inflation Hits Three-Year Low

Essential Insights

The ECB has implemented a rate cut of 25 basis points after inflation fell to a notable 1.8%.
Markets expect further rate reductions by December.

The Eurozone Central Bank (ECB) has cut its interest rate by 25 basis points during today’s monetary policy meeting, reducing the key rate from 3.5% to 3.25%. This marks the third rate decrease this year, following a September inflation rate that fell to a three-year low of 1.7%, below the previous estimate of 1.8%.

The ECB’s decision was anticipated, given the ongoing decline in both headline and core inflation rates across the eurozone. With September’s inflation dipping below the bank’s target of around 2%, the necessity for raising interest rates to contain price hikes has diminished.

Furthermore, prior to the meeting, various ECB officials, including President Christine Lagarde and Bank of France Governor Francois Villeroy de Galhau, indicated the potential for a rate cut. Lagarde expressed optimism that “inflation will return to target in a timely manner.”

The ECB’s first rate cut occurred in June, dropping its benchmark rate from 4% to 3.75%. The second cut further reduced the rate to 3.5% in September. Following today’s decision, financial markets are forecasting an additional 25-basis-point cut to 3% in December.

Concerns about the economy also factor into the ECB’s decision. The eurozone is experiencing sluggish growth, with projections for stagnant GDP in the third quarter.

The ongoing tight monetary policy and structural challenges contribute to the slowdown. Lowering interest rates is seen as a way to stimulate economic activity in the face of growth hurdles, cooling labor markets, and geopolitical tensions.

The expected rate decrease aims to boost economic growth and enhance traditional equity market performance. This could also increase investor appetite for riskier assets, such as Bitcoin.