ECB Lowers Rates and Eyes More Cuts as Economy Sags

The European Central Bank (ECB) cut interest rates by 25 basis points (bps) on Thursday for the third time this year, saying inflation in the eurozone bloc was increasingly under control, while the outlook for the economy was worsening¹.
ECB president Christine Lagarde did not provide hints about future moves, but four sources close to the matter told Reuters a fourth cut in December is likely unless economic or inflation data turns around in the coming weeks. The U.S. elections, and the threat of fresh trade tariffs if Donald Trump is elected president, were seen as a major source of uncertainty, the sources said. Asked about that risk, Lagarde said any trade obstacles were a "downside" for Europe.
However, she added that the ECB did not expect a recession at present and was still working on the assumption that the economy would stage a "soft landing", jargon for lower - but still positive - growth. The quarter-point cut brings the rate that the ECB pays on banks' deposits down to 3.25%. Money markets are almost fully pricing in three further reductions through next March.
Prices grew by just 1.7% last month, falling below the 2.0% target for the first time in three years. While inflation may edge above the ECB's target by the end of this year, it is expected to hover around that level for the foreseeable future. The ECB noted pay rises are still supporting "domestic inflation" - that is growth in the price of services and goods that don't rely much on imports - but this too was waning.
High interest rates have sapped investment and economic growth, which has been weak for nearly two years. The most recent data, including industrial output and bank lending, is pointing to more of the same in the coming months. A resilient labour market is also starting to show cracks, with the vacancy rate - or the proportion of vacant jobs as a share of the total jobs - falling from record highs. This has fuelled calls inside the ECB and from politicians from Germany to Italy to ease policy before it is too late.
Nonetheless, some of the economic weakness is due to structural problems, such as the high energy costs and low competitiveness hobbling Europe's industrial powerhouse Germany. Lagarde repeated the ECB's customary call on Europe's politicians to push ahead with "ambitious" reforms to make the region's economy more productive, competitive and resilient.

(Source: Reuters)