European Central Bank Cuts Interest Rates

(Reuters) – The European Central Bank (ECB) cut interest rates for the third time this year on Thursday, responding to sluggish economic growth and easing consumer price pressures.

The ECB reduced its deposit rate by 25 basis points to 3.25%, aligning with analyst predictions in a Reuters poll. This move acknowledges that inflation, now below 2%, could approach its 2% target more quickly than previously anticipated.

However, the bank did not provide new indications regarding its future decisions, despite market expectations for similar cuts in the next three meetings, aiming to bring rates from a restrictive to a neutral level by the end of next year.

"The incoming information on inflation shows that the disinflationary process is well on track," the ECB stated. The inflation outlook is also influenced by recent disappointments in indicators of economic activity.

A rate cut was widely anticipated following policymakers' arguments for swifter policy easing ahead of the meeting, amid a range of weak growth indicators and stable inflation data.

Weak consumer spending, poor sentiment indicators, and ongoing industrial recession imply that the bloc is barely growing, which could exert downward pressure on inflation, now at 1.7%—the lowest level in three years.

"Domestic inflation remains high as wages continue to rise significantly. Labour cost pressures are expected to ease gradually, with profits acting as a cushion against inflation impacts," the ECB noted.

Nonetheless, conservative policymakers may resist rapid rate cuts, fearing inflation could rise in the coming months.

The tight labour market, ongoing union demands for substantial wage increases, volatile energy costs, and rising service prices suggest domestic inflation may remain relatively high for a while.

Conversely, more dovish members argue that growth is so weak, immediate ECB action is necessary to support the economy or risk inflation dropping below target—forcing the ECB to shift from combating high inflation to managing excessively low inflation.

This ongoing debate was unlikely to reach a resolution on Thursday, suggesting that ECB President Christine Lagarde may provide no commitments or insights on future policy moves during her news conference at 1245 GMT.