LONDON — In light of recent economic indicators, the European Central Bank (ECB), which governs interest rates for the 20 nations utilizing the euro, is poised to once again reduce borrowing rates on Thursday. This decision comes after reports revealed that inflation in the eurozone has plummeted to its lowest level in over three years and economic growth appears to be stagnating.
The ECB’s governing council is anticipated to decrease its benchmark interest rate from 3.5% to 3.25% during a meeting set to take place in Ljubljana, Slovenia, marking a departure from its traditional location in Frankfurt, Germany. If completed, this would mark the third consecutive reduction since the cutbacks began in June.
September data indicated that inflation has dropped more steeply than analysts expected, hitting a rate of 1.8%, the first instance in over three years where it has fallen below the ECB’s target of 2%. Many experts are predicting further rate cuts as early as December. This sentiment is only intensified by concerns about the eurozone’s minimal growth, recorded at just 0.3% during the second quarter, leading to an expectation that ECB President Christine Lagarde will not counter the prevailing outlook.
Holger Schmieding, chief economist at Berenberg Bank, stated, “The trends in the real economy and inflation support the case for lower rates,” indicating that the current climate is conducive to this monetary policy adjustment.
A key factor contributing to the global decline in inflation is the significant hike in borrowing costs implemented by central banks, which were raised from near-zero during the COVID-19 pandemic. This surge in rates was initially a reaction to escalating prices that began with supply chain disruptions and were further exacerbated by Russia’s full-scale invasion of Ukraine, which significantly increased energy prices.
Established in 1999 alongside the introduction of the euro currency, the ECB began raising interest rates in the summer of 2021, ultimately reaching a peak of 4% in September 2023. This strategy aimed to combat inflation by making borrowing costlier for both businesses and consumers; however, these measures have adversely affected overall economic growth.
