Weak economy urgently needs stimulus, European Central Bank announces third interest rate cut this year

According to Zhitong Finance APP, the European Central Bank cut interest rates for the third time this year, as the accelerated decline in inflation allows it to provide support for the struggling economy of the Eurozone.

On Thursday, the European Central Bank lowered the key deposit rate by 25 basis points to 3.25%, in line with all analysts' expectations. The European Central Bank stated that the process of controlling prices is "on track," but did not provide any clues as to when or at what pace it will continue to lower borrowing costs.

In a statement, the European Central Bank said, "To achieve this goal, it will maintain sufficiently strict policy rates as necessary. The Governing Council will continue to follow an approach that relies on data and successive meetings to determine the appropriate level and duration of restrictions."

Thursday's move accelerated officials' efforts to unlock the Eurozone economy. Earlier data showed that the Eurozone inflation rate fell below 2% for the first time since 2021, while private sector activity weakened, and cracks appeared in the previously resilient labor market.

Furthermore, more risks lurk further afield: hostile actions in the Middle East and potential tariff policies that may accompany Trump's return as U.S. president could undermine market confidence. Policymakers are also watching the Federal Reserve after it began its easing cycle.

European Central Bank President Lagarde told European lawmakers this month that "the latest developments have strengthened our confidence that inflation will return to target levels in a timely manner." This statement sent the clearest signal yet that the European Central Bank will cut rates again.

Even some hawkish individuals acknowledge the worsening economic risks, with Executive Board member Isabel Schnabel stating that officials "cannot ignore factors that are detrimental to economic growth."

Before she made the above remarks, with manufacturing woes deepening and services slowing down, private sector output shrank for the first time since March. A survey showed analysts lowering their forecasts for the Eurozone's third and fourth quarters, as well as for 2025.

Strong demand from Mediterranean countries including Spain, Portugal, and Greece is working to help the Eurozone's 20 countries avoid recession. However, the region's largest economy, Germany, continues to lag behind, with output possibly declining for the second consecutive year due to weak demand in major export markets. Geopolitical tensions could make the situation worse.

Meanwhile, the inflation rate sharply dropped to 1.7% in September. Officials emphasize that the battle to control prices is not yet won, as a pressure indicator in the services sector remains around 4%. However, market bets on monetary easing policies have been increasing Economists surveyed also agree with the view of the money market that there may be further interest rate cuts at every European Central Bank meeting before March next year. After that, the pace of easing may slow down, and by the end of 2025, the deposit rate will be lowered to 2%.

This will place it at the lower end of the so-called neutral interest rate expectations, which neither stimulate nor restrict economic activity. Analysts expect rates to quickly reach the range of 2%-2.5%.

Sören Radde, Head of European Economic Research at Point72, stated before the interest rate decision was announced, "Rates will go straight to neutral." In recent weeks, there has been a shift in the risks surrounding the outlook for the European Central Bank, "from the risk of persistent inflation to the risk of inflation possibly being too low."