ECB cuts key lending rate by 25 bps, lowers annual economic growth projection by 10 bps

The European Central Bank (ECB) on Thursday announced a reduction of 25 basis points, or 0.25 percentage point, in its key interest rate, with its president Christine Lagarde stressing that future decisions will be cased on a data-centric approach. The decision came amid cooling inflation and sluggish economic growth in the region. 

While the move was as widely expected, the central bank left no clue as to whether it will continue to ease its monetary policy in the following meetings. 

After the cut, the benchmark deposit rate–formally known as the deposit facility rate–stands revised to 3.5 per cent, from 3.75 per cent until now. It is the key rate at which the ECB steers its monetary policy stance. 

The dynamics of underlying inflation and the strength of monetary policy transmission make it "now appropriate to take another step in moderating the degree of monetary policy restriction", according to an official statement. 

The reduction follows a similar move in its June review, and comes at a time when investors globally await a key rate decision by the Federal Reserve next week. 

The ECB acts as the central bank for the 20 countries that share the euro.

Inflation across the euro zone fell back towards the ECB's target of 2 per cent in August. 

"Recent inflation data have come in broadly as expected, and the latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026, as in the June projections. Inflation is expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates," noted the ECB.

It also said that inflation "should then decline towards our target over the second half of next year". 

The ECB said its Governing Council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner and that it will "keep policy rates sufficiently restrictive for as long as necessary to achieve this aim".

Economic forecast

The ECB revised its 2024 growth forecast to 0.8 per cent from 0.9 per cent citing “weaker contribution from domestic demand" in the next few quarters.