ECB cuts key interest rate to 3.25%

The European Central Bank (ECB) cut its key interest rate by a quarter-point to 3.25%, as a souring growth outlook and weaker-than-expected inflation in September drove rate-setters to step up the pace of policy easing.

“The disinflationary process is well on track,” ECB President Christine Lagarde said at her regular press conference, pointing repeatedly to recent downside surprises in other economic indicators that she said had strengthened the Bank’s confidence that the post-pandemic inflation surge is all-but over.

She noted that the decision had been unanimous, but added that there had been no discussion of a larger cut, similar to the half-point cut made by the U.S. Federal Reserve in September.

Lagarde stressed that the Bank is not “pre-committed” to further action, and said more than once that the euro area is not heading for a recession, despite an alarming slowdown in Germany, the currency union’s biggest economy.

But this was the first time the ECB had cut interest rates in back-to-back meetings in 13 years, and analysts said they now expect the Bank to ease policy over the next few months at a faster rate than it wanted or expected to before the summer.

“In our view, this is unlikely to be the last cut from the ECB this year,” said UBS Global Wealth Management chief economist Dean Turner. “Another cut is likely in December, and we expect this will be followed by a series of cuts at every meeting through to June next year, with the deposit rate hitting 2 percent before the ECB reaches for the pause button.”

Gathering in Ljubljana for their annual off-site meeting, policymakers said that rates are still at a level that is restraining the economy, pointing to high domestic inflation and wage growth that is only gradually coming down from unsustainable levels.

“The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” the ECB said.