The European Central Bank has once again reduced interest rates, marking the second consecutive meeting in which it has opted for a rate cut, as it seeks to bolster an economy that is exhibiting growing indications of fragility. The European Central Bank announced a reduction of its key interest rate from 3.5% to 3.25%. This expands the disparity in benchmark borrowing costs relative to the Federal Reserve.

The ECB is increasingly prioritizing growth support over curbing inflation, implementing consecutive rate cuts for the first time since 2011. Thursday’s statement referenced “recent unexpected declines in measures of economic performance.”

Europe confronts a distinct array of challenges compared to the U.S., where economic expansion remains robust. The eurozone economy seems to have regressed over the summer following a fleeting recovery in the first half of the year.

Germany, the largest economy in the bloc, has experienced minimal growth since prior to the pandemic. The indicators for the upcoming months appear unfavorable. The composite purchasing managers index for the eurozone, a key indicator of private sector activity, fell into contractionary territory last month for the first time since February. Sluggish growth in China, a vital export market, coupled with sustained elevated energy prices driven by the conflict in Ukraine, has adversely affected both consumers and businesses.

Headline inflation registered at 1.7% last month, falling short of the ECB’s 2% target. Concerns regarding the growth outlook expressed by ECB President Christine Lagarde, who is set to hold a news conference at 8:45 a.m. ET, may suggest that the bank is poised to implement easing measures more swiftly than the market anticipates.

The ECB indicated in a statement that recent data suggests the disinflationary process is progressing as anticipated.

The ECB indicated that it would assess interest rates on a meeting-by-meeting basis, relying on incoming economic data, which reflects an uncertainty regarding the severity of current conditions. The institution is inclined to adopt a wait-and-see approach before making additional cuts, although market participants anticipate that the ECB will reduce interest rates once more at its upcoming meeting in December, targeting a rate of 3%.

The outlook for 2025 remains contentious, with varying opinions prevailing among analysts. Investors are presently anticipating rates to stabilize just under 2% in the latter half of next year. However, some analysts suggest that a rate of 2.5% is more probable if wage growth and core inflation do not show further signs of weakening.

“The ongoing sluggishness in growth reinforces our view that the ECB overstepped by increasing the deposit rate to 4%…””There is now a concern that, in the event of rate cuts, the ECB might err in the opposite direction and overly relax its policy,” remarked Holger Schmieding, chief economist at Berenberg Bank.