European Central Bank Cuts Rates Again as Inflation Falls Below Target

The European Central Bank (ECB) has lowered its interest rates again, reducing the benchmark rate from 3.5% to 3.25%. This decision, announced at a meeting in Ljubljana, Slovenia, marks the third rate cut since June and comes in response to inflation in the eurozone dropping to its lowest level in over three years.

In September, inflation across the 20 countries using the euro currency fell to 1.7%, dipping below the ECB’s target rate of 2% for the first time in three years. Despite the slowdown, the ECB does not expect the eurozone to slide into a recession. The region expanded by a modest 0.2% in the second quarter of the year, with economic growth waning but not contracting.

Economists anticipate that mounting evidence of an economic slowdown, particularly in Germany, may pressure the ECB to consider another rate cut at its next policy meeting in December. Further reductions could help bolster growth by making borrowing even cheaper for businesses and consumers.

The ECB began adjusting its rates in the summer of 2021 to combat rising inflation, which had peaked after the COVID-19 pandemic and was exacerbated by events like Russia’s invasion of Ukraine in early 2022. These factors increased energy costs and disrupted supply chains, leading to higher prices. Interest rates reached a record high of 4% in September 2023 before the recent cuts.

The fall in inflation is partly attributed to significant increases in borrowing costs implemented by central banks worldwide, including the ECB and the U.S. Federal Reserve. As inflation rates have fallen, these institutions have started to cut interest rates. The ECB acknowledges that recent data on economic activity has been somewhat weaker than expected, citing contractions in the manufacturing sector and weaker exports.

Despite Germany’s economy shrinking by 0.1% in the second quarter, the ECB remains optimistic that the eurozone economy overall will not enter a recession. However, potential risks could impact this outlook, including geopolitical tensions in the Middle East and the possibility of new trade tariffs that may affect European exports.

For more information, read the full article on AP News.