ECB cuts key interest rate to 3.5% amid slowing inflation and growth concerns

The European Central Bank (ECB) cut its key interest rate by 25 basis points to 3.5%, responding to slowing inflation in the Eurozone and concerns over weak growth. The decision, which aligns with market expectations, follows a period of monetary easing that began in June. The ECB remains focused on bringing inflation back to its medium-term target of 2%, but has not committed to future rate cuts. Inflation in the Eurozone has decreased to 2.2%, and the ECB expects it to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026.

The ECB’s decision to lower rates comes amid a broader trend of inflation cooling, though the bank noted core inflation remains high, driven by rising wages. The ECB expects inflation to pick up slightly later this year before converging toward its target next year.

Economic growth forecasts for the Eurozone were revised downward, with the ECB now expecting growth of 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026. This reflects weaker domestic demand and tight financing conditions, as private consumption and investment continue to lag.

The ECB’s Governing Council will maintain a cautious, data-driven approach to future monetary policy decisions. It emphasized the need for restrictive rates to persist as long as necessary to ensure inflation stays on target. Additionally, changes to the ECB’s operational framework, including adjustments to interest rate spreads, will take effect on September 18.

The ECB also reiterated its plans to reduce its asset purchase programs, with the Pandemic Emergency Purchase Programme (PEPP) portfolio set to shrink by EUR 7.5 billion per month on average. The bank intends to end reinvestments under the PEPP by the end of 2024.