European Central Bank cuts interest rates for third time this year

The European Central Bank made its first back-to-back interest rate reduction in more than a decade, reducing its key rate by 25 basis points in an effort to support the eurozone’s weakening economy.
The bank lowered the main deposit rate to 3.25 per cent from 3.5 per cent in the third cut this year as it pares the cost of borrowing from a record high of 4 per cent.
The move came after a range of data reinforced concerns that the bloc’s major economies are struggling. Germany, its largest economy, is projected to expand by just 0.1 per cent this year, according to the OECD, which expects the eurozone economy as a whole to expand by 0.7 per cent.
Inflation across the 20-nation region area fell to 1.7 per cent in September from 2.2 per cent the previous month, below the ECB’s target. Wage pressures, often singled out as a source of inflationary concern, have also cooled more quickly than expected.
As a result, a desire to stimulate economic activity trumped worries about inflation on the ECB’s governing council.
The decision to cut interest rates at back-to-back meetings for the first time in 13 years “represents a pivot point into a faster normalisation of monetary policy”, Mark Wall, chief European economist at Deutsche Bank, said.
Matthew Landon, global market strategist at JP Morgan Private Bank, said that the ECB wanted to send a “clear signal to the market that concerns within the governing council are shifting from inflation to growth”.
In a statement announcing the latest rate reduction, the governing council said: “The incoming information on inflation shows that the disinflationary process is well on track.”
It added that the weaker inflation outlook was driven by “downside surprises in indicators of economic activity”.
Traders in financial markets expect the ECB to continue to lower borrowing costs over the coming year at a faster pace than both the Bank of England and the US Federal Reserve. The governing council said it was “not pre-committing to a particular rate path”.
The Fed last month cut its benchmark rate by a bumper 50 basis points to between 4.75 per cent and 5 per cent as fears over a slowing jobs market overtook concerns about inflation. The Bank of England, meanwhile, is expected by money markets to make two more cuts this year, which would take the borrowing rate to 4.5 per cent, having made its first reduction from 5.25 per cent to 5 per cent in August.
Tomasz Wieladek, chief European economist at T Rowe Price, the investment firm, said: “While the ECB talks about weaker growth, at the same time it acknowledges that domestic inflation remains high and that wage growth is elevated. This balanced language is a signal that the ECB wants to keep all of the options on the table.”
The euro weakened by 0.21 per cent against the pound to 83p and rose slightly on the US dollar. The pan-European Stoxx 600 index climbed by 0.83 per cent, or 4.33, to 523.94. London’s FTSE 100 jumped by 0.67 per cent, or 56.06, to close at 8,385.13.
Yields on eurozone government bonds picked up slightly, with the rate on the 10-year German bund up by two basis points to 2.209 per cent.