European Central Bank cuts main interest rate a quarter-point to 3.25% as inflation fades

The European Central Bank, which sets interest rates for the 20 countries that use the euro currency, cut borrowing costs once again on Thursday after figures showed inflation across the bloc falling to its lowest level in more than three years and economic growth waning. 

The bank’s rate-setting council lowered its benchmark rate from 3.5% to 3.25% at a meeting in Llubljana, Slovenia, rather than its usual Frankfurt, Germany, headquarters. 

The rate cut is its third since June and shows optimism among rate-setters over the path of inflation. Inflation sank to 1.8% in September, the first time in three years that it has been below the ECB’s target rate of 2%. 

Inflation has been falling more than anticipated — in September, it was down at 1.8%, the first time it has been below the ECB’s target of 2% in more than three years — and analysts think the bank will lower rates in December, too. Mounting evidence that the eurozone is barely growing — just 0.3% in the second-quarter — has only accentuated the view that ECB President Christine Lagarde will not seek to dislodge that expectation. 

“The trends in the real economy and inflation support the case for lower rates,” said Holger Schmieding, chief economist at Berenberg Bank. 

One reason why inflation has fallen around the world is that central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of Russia’s full-scale invasion of Ukraine which pushed up energy costs. 

The ECB, which was created in 1999 when the euro currency was born, started raising interest rates in the summer of 2021, taking them up to a record high of 4% in Sept. 2023 to get a grip on inflation by making it more expensive for businesses and consumers to borrow, but that has come at a cost by weighing on growth. 
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