Europe has once again reduced interest rates as the economic recovery stumbles.
The European Central Bank headquarters in Frankfurt, Germany, as shown on September 9, 2024. Photo by Boris Roessler/picture-alliance/dpa/AP
The European Central Bank (ECB) cut interest rates again on Thursday, marking the second reduction in recent months as inflation shows signs of easing and the European economy struggles.
The decision, anticipated by many and agreed upon by all 26 ECB policymakers, brings the benchmark interest rate in the eurozone’s 20 nations down to 3.5%, a decrease from the previous 3.75%.
This follows the ECB’s first rate cut in five years back in June, though rates were left unchanged in July. Since then, inflation has continued to decline, reaching 2.2% in August, the lowest level in three years and edging closer to the ECB’s 2% goal. Additionally, wage growth—a key focus for the central bank—slowed in the second quarter.
In its statement, the ECB reported that inflation trends were “broadly as expected,” maintaining its 2024 inflation forecast at 2.5%, in line with its June predictions. However, the growth outlook for the eurozone was slightly revised down to 0.8% from the previous 0.9%.
“Financing conditions remain restrictive, and economic activity continues to be sluggish, driven by weak private consumption and investment,” the ECB said.
Economic concerns have re-emerged for the region after narrowly avoiding a recession last year. Although growth has resumed, it slowed in the April-to-June period, with Germany—the eurozone’s largest economy—seeing a contraction in output during that time.
Earlier this week, former ECB chief Mario Draghi highlighted in a report that slowing economic growth and productivity pose an “existential challenge” for Europe.
He also cautioned that Europe is lagging behind the U.S. and China in innovation, particularly in advanced technologies. To boost the European Union’s economic competitiveness, Draghi suggested that annual investment in the EU should increase by €750 billion to €800 billion ($826 billion to $882 billion).
“Achieving this would require the EU’s investment share to rise from around 22% of GDP to approximately 27%, reversing a long-term decline seen in most major EU economies,” Draghi noted.
ECB President Christine Lagarde endorsed Draghi’s report on Thursday, calling it “formidable” for its accurate and severe diagnosis. She emphasized the need for “many important structural reforms” as outlined in the report.
Most traders do not anticipate another interest rate cut by the ECB at its next meeting on October 17. Lagarde reaffirmed that the central bank will remain “data dependent” and make decisions “meeting by meeting” regarding interest rates.
