The European Central Bank (ECB) has cut interest rates for the third time this year, as it says the process of reducing inflation in the eurozone economy is "well on track".
The ECB's governing council announced on Thursday that it is lowering its three key interest rates by 25 basis points each. The headline deposit interest rate will fall to 3.25%, and the main refinancing operations and the marginal lending facility will fall to 3.40% and 3.65% respectively.
The interest changes will take effect from 23 October, and follow two previous cuts in June and September.
Reversing record rate hikes
In a bid to slow the momentum of spiralling inflation (caused by factors such as the pandemic, disrupted supply chains and increased energy costs following Russia's invasion of Ukraine), the ECB raised its benchmark deposit interest rate ten times between July 2022 and September 2023, from 0% to a record high of 4%.
Today's rate cut is the third this year as the ECB has begun to loosen monetary policy. The cut was widely expected as data released earlier today showed that eurozone inflation slowed to 1.7% in September – the first time it has fallen below the ECB's 2% target in more than three years.
The ECB noted that it expects inflation to rise again in the coming months before it falls to meet the 2% target next year. The Governing Council said it based its decision on its latest inflation outlook, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.
Speaking at a press conference in Ljubljana in Slovenia on Thursday, ECB President Christine Lagarde said the ECB decided to cut interest rates as the "disinflationary process is well on track", adding that all indicators over the past five weeks have been "heading in the same direction: lower".
"We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim," she said, adding that the ECB will continue to follow a "data-dependent and meeting-by-meeting approach", without pre-committing to any particular rate path.
Balancing inflation and economic growth
Raising interest rates is a tool used by central bankers to bring down inflation, but it can also lead to a slowdown in economic growth. The Governing Council noted that "downside surprises" in economic activity were also a factor in cutting interest rates on Thursday.
"We are concerned about growth to the extent that it has an impact on inflation, and we have to be particularly attentive to both," Lagarde told reporters, but added that lowering inflation is still the ECB's "main focus and key objective".
The US Federal Reserve cut interest rates for the first time in four years in September, while the Bank of England is also expected to cut interest rates next month.
