ECB Cuts Interest Rates to 3.25% Amid Easing Inflation and Weakening Growth

The European Central Bank (ECB) has reduced its key interest rate to 3.25%, marking its third quarter-percentage-point cut this year. This move, anticipated by markets, comes as the ECB addresses falling inflation and a slowing economic outlook. It is the first time since 2011 that the ECB has made back-to-back rate cuts at consecutive meetings, signaling a significant shift in monetary policy.

ECB Signals Disinflation Progress

In its post-decision statement, the ECB’s Governing Council expressed confidence in the disinflation process, describing it as “well on track.” Policymakers highlighted that inflation risks have diminished, largely due to weaker-than-expected economic activity. Headline inflation in the euro area dropped to 1.8% in September, falling below the ECB’s 2% target for the first time in three years. This development has contributed to growing expectations for more aggressive monetary easing.

The ECB’s actions align with dovish sentiment from its policymakers, including President Christine Lagarde, who has reassured markets that inflation will return to target “in a timely manner.” This, coupled with the weaker inflation data, has led markets to price in more cuts before the year’s end. As of Thursday morning, markets had fully priced in two additional rate cuts.

Economic Growth Outlook Dims

Alongside inflation, the ECB is also grappling with a deteriorating growth outlook in the euro zone. In its most recent forecasts, the ECB cut its 2024 growth projection to 0.8%, down from 0.9%, citing weaker domestic demand. Some of the euro zone’s largest economies continue to face headwinds, with Germany’s manufacturing sector under strain and France dealing with significant fiscal tightening measures. Overall sentiment indicators remain weak across the region, further complicating the growth picture.

Market Forecast: Bearish Outlook for Euro

Daily EUR/USD

Given the ECB’s dovish stance and weakening economic data, the euro zone is likely to see continued monetary easing. The sustained weakness in growth, particularly in Germany and France, and falling inflation pressures point to further rate cuts, creating a bearish outlook for the euro. Investors should brace for continued softness in the euro in the short term, as markets increasingly anticipate more accommodative policy measures.