Running ahead of the Federal Reserve again! The European Central Bank cuts interest rates for the second time this year by 25 basis points, lowering the Eurozone GDP growth rate

According to the Zhitong Finance APP, as the inflation rate drops to 2% and concerns about the economy intensify, the European Central Bank cut interest rates for the second time this year.

On Thursday, the European Central Bank lowered the key deposit rate by 25 basis points to 3.5%, in line with analysts' expectations. The ECB reiterated that it will not commit to a specific rate path in advance.

The central bank stated in a release: "Based on the Governing Council's latest assessment of the inflation outlook, the potential inflation dynamics, and the strength of monetary policy transmission, it is appropriate to take further measures now to ease the degree of monetary policy restriction."

Traders have already priced in further easing bets, expecting another 36 basis point cut by the end of the year. This means the market has fully digested the expectation of a 25 basis point cut, with the probability of another rate cut based on these expectations being less than 50%.

Like other central banks around the world, the European Central Bank is increasingly confident that consumer price growth is returning to target levels after experiencing historic spikes. Meanwhile, the economies of the eurozone's 20 countries are losing momentum. Weak external demand has prevented households from sustaining the rebound seen earlier in the year, and manufacturers remain in a slump.

This weakness has led the European Central Bank to lower its forecasts for Gross Domestic Product (GDP) in 2024, 2025, and 2026, with growth expected to be 0.8% this year, down from the previous forecast of 0.9% in the last quarter. The inflation outlook remains broadly unchanged.

Additionally, two other rates at which banks can borrow from the European Central Bank have been cut by 60 basis points each, as part of a long-term strategic shift, which will not have an immediate impact.

The decision on Thursday comes less than a week after the Federal Reserve began easing US monetary policy. So far, the Bank of England has cut interest rates once and will hold a monetary policy meeting the day after.

Before announcing this decision, the eurozone's inflation rate for August fell to 2.2%, with data showing that the rapid wage growth driving price increases—especially in the service sector—is slowing down. In the second quarter, the comprehensive indicator measuring worker wages—growth in average compensation—fell from 4.8% in the first quarter to 4.3%.

However, the danger is not over yet: service price growth in August actually accelerated to 4.2%. While the Paris Olympics may have boosted the inflation rate, some officials are not yet ready to declare victory over inflation European Central Bank Executive Committee member Isabel Schnabel said that interest rate cuts cannot be mechanical and must be "based on data and analysis." Chief economist Philip Lane stated that the return of inflation to the 2% target is not yet "guaranteed," but he warned that high borrowing costs should not drag down the economy.

Several of his colleagues share the same concerns. Portuguese Central Bank Governor Mario Centeno is worried that inflation will return to levels below the target before the pandemic. In the latest data release before this week's meeting, GDP growth for the second quarter was revised down from 0.3% to 0.2%.

Former European Central Bank President Mario Draghi warned this week that slow economic growth in Europe could persist for a long time. In a long-awaited report, he proposed a series of remedial measures, although his costly suggestions were immediately rejected by Germany.

At least for now, the outlook for interest rates is somewhat predictable. Analysts surveyed expect the European Central Bank to cut interest rates quarterly before September 2025. However, doubts are spreading due to weak economic conditions. Goldman Sachs now predicts that interest rates will be cut at every meeting next year until the deposit rate reaches 2% in July.

European Central Bank President Christine Lagarde told reporters in Frankfurt, "The economic recovery faces some obstacles," emphasizing that risks still lean towards the downside. "The restrictive monetary policy effects are gradually fading and are expected to support consumption and investment." Regarding inflation, she stated that although overall labor cost growth is slowing down, wage increases will remain high and the trend is unstable