The European Central Bank cut interest rates for the third time this year in a desperate effort to relaunch economic activity in Europe.
The European Central Bank slashed interest rates for the second time in a row, and the third time this year. The ECB first cut interest rates in June, the first major central bank to do so.
Key interest rates in the Eurozone were cut to 3.25%, down from the previous 3.5%. This is the first time the ECB has cut rates in a back-to-back meeting since 2011.
ECB President Christine Lagarde cited inflation on a downward spiral as the main reason for the rate cut. In September, inflation in the 20 countries sharing the euro averaged a 1.8% growth year-to-year. The ECB, like most advanced central banks in the world, aims at a 2% inflation growth to maintain healthy economic growth.
Lagarde and the ECB committee believe inflation will slightly tick upward in the coming months, though remaining under control. Price levels will likely hover around the 2% level for most of 2025.
“We believe the disinflationary process is well on track and all the information we received in the last five weeks were heading in the same direction - lower,” ECB President Christine Lagarde told a press conference after the monetary announcement.
Economic stagnation
In the press conference, Lagarde also noted Europe’s stagnating economic growth, which is putting the continent behind its peers, namely the United States and China.
The economy of the United States expanded immensely after the COVID-19 pandemic, propelled by consumer demand and government spending. China, albeit with its economic difficulties, still managed a 5% or more growth per year.
The ECB lowered Europe’s growth forecast to 0.8% down from the previous measurement of 0.9%. “We certainly do not see a recession. We are still looking at that soft landing,” Lagarde said.
Still, Europe’s growth shows signs of increasing stagnation. Germany, the EU’s largest economy, is undergoing one of its worst economic crises since WWII and is dragging the rest of the continent behind.
Germany, whose economy is projected to grow by 0.1% in 2024, was severely hit by the energy crisis following Russia’s invasion of Ukraine. The German industrial output, quite literally Europe’s economic engine, keeps declining every month.
“Now we face a new risk: undershooting target inflation, which could stifle economic growth,” Portuguese central banker Mario Centeno said recently. “Fewer jobs and reduced investment would add to the sacrifice ratio already endured.”
