ECB Cuts Interest Rates to 3.25% Amid Slowing Inflation to Support Growth

The European Central Bank (ECB) has reduced its key interest rate by 25 basis points to 3.25%, marking the third consecutive cut this year. This move reflects confidence that inflation is easing faster than anticipated, allowing policymakers to shift focus toward supporting the euro-zone economy, which has shown signs of stagnation.

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Inflation in Retreat: Room for Easing

• Inflation fell to 1.7% in September, the lowest since 2021.
• Services inflation remains elevated, hovering near 4%, suggesting persistent upward pressures.
• The ECB expects to bring inflation under control by early 2025, advancing its earlier forecast of mid-2025.

Markets anticipate continued rate cuts at each meeting through March 2025, with the deposit rate potentially settling around 2% by the end of next year.

Sluggish Growth in Key Economies

While Germany, the euro zone’s largest economy, struggles with weak exports to China, Spain, Portugal, and Greeceare helping the region avoid a recession through strong domestic demand. A trade spat between Brussels and Beijing could further weigh on the economy, adding to risks.

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Outlook: Cautious but Ready to Act

Analysts expect gradual easing, with the ECB likely slowing the pace of cuts in 2025. However, if growth falters, back-to-back reductions could continue. The ECB aims to reach a neutral rate of 2%-2.5%, which neither stimulates nor restricts economic activity.

Global Risks Add Complexity

Geopolitical tensions, including Middle East hostilities and a possible shift in U.S. policy, remain key concerns for ECB officials. Additionally, policymakers are keeping an eye on the Federal Reserve, which has begun its own easing cycle, potentially influencing global markets.

Market Response

German 10-year bond yields rose slightly to 2.20% after the rate cut, while markets have fully priced in another quarter-point reduction by December. The ECB’s strategic shift aims to revive growth without reigniting inflation. As inflation cools and external risks loom, the bank will need to tread carefully to ensure a sustainable recovery.

Also Read: RBI Repo Rate Cuts Likely Delayed to 2025 as Inflation Hits Nine-Month High