ECB cuts interest rates again as inflation cools

FRANKFURT — The European Central Bank cut its key deposit rate by 0.25 percentage points to 3.50 percent, responding to a drop in inflation and increasing signs of weakness in the eurozone economy over the summer.
However, ECB President Christine Lagarde warned that the lingering risk of inflation means it’s unlikely to ease conditions for struggling businesses and homeowners any more aggressively, and she hinted that the bank will be in no hurry to cut again when it next meets in October.
The bank acknowledged that the outlook for the economy has darkened over the summer, with an ongoing real estate crisis in China and an increasingly visible slowdown in the U.S. adding to problems of weak demand and low confidence at home.
In a new set of quarterly projections, the ECB shaved its growth forecasts for each of the next three years by 0.1 percent, and Lagarde told her press conference that the risks remain “tilted to the downside.”
But she repeated that the bank’s base case is for a steady acceleration in growth over the next couple of years, supported by wages that are now rising faster than prices. It sees growth of 0.8 percent this year, rising to 1.3 percent next year and 1.5 percent in 2026.
That weakness has bolstered the bank’s confidence that inflation will return to its 2 percent target within two years and stay there. But while Lagarde said the direction of the ECB’s rates was now “clearly downward,” she warned that the extent of future rate cuts “is not predetermined, either in terms of sequence or in volume.”
And while she acknowledged that headline inflation in October is likely to fall sharply due to base effects, she repeated her previous guidance that the bank will not be swayed too much by individual data points. She said it will rise again in the fourth quarter, and reminded her audience that services inflation — supported by wage deals that continue to run at high levels to catch up with the prices increases of 2022-2023 — remains “persistent” and “unsatisfactory.”
Financial markets pared back their expectations of back-to-back cuts in response, sending short-dated bond yields higher, and nudging the euro up against the dollar and pound.
The ECB’s caution was welcomed by economists but drew criticism from politicians.
“With wage growth far outpacing productivity and service inflation picking up again, the Governing Council has no reason to accelerate the pace of cutting rates or commit to further rate cuts at this stage,” S&P Global’s chief economist for Europe, Middle East and Africa Sylvain Broyer said in e-mailed comments.
However, Markus Ferber, the most senior MEP from the center-right EPP grouping on the European Parliament’s economic and monetary affairs committee, grumbled that “the ECB tends to be too cautious too often. Lagarde was late when it came to raising rates when inflation was running hot. Now there is a chance that the ECB repeats the same mistake on the other side of the cycle.”
Resounding endorsement for Draghi report
Lagarde was, inevitably, asked for her views on the wide-ranging report on European competitiveness delivered this week by her predecessor, Mario Draghi.
She praised the report’s “severe but just” critique of the EU‘s shortcomings (many of which Draghi had highlighted while himself still at the ECB). But she stressed that it wasn’t the ECB’s job to finance political ambitions.
“Structural reforms are not the responsibility of the central bank — they are the responsibility of governments,” she said, pre-empting suggestions that the ECB could help make the task of financing the policy challenges raised by the report.
“I’m really certain monetary policy will do what it has to do, which is to provide price stability and deliver on its mandate,” she said.
Earlier, in  addition to cutting the deposit rate, the ECB had also adjusted its main refinancing and marginal lending rates, to 3.65 percent and 3.90 percent respectively. That was in line with its announcement in March to narrow the spread between the rate on its official facilities. This is a technical move that is not expected to have an impact on money market rates on the near term.
(CORRECTION: The initial version of this story misstated the year in which inflation is expected to fall below 2 percent. The article has also been updated with additional comment and market reaction. )