The European Central Bank responded to declining inflation in the Eurozone and indicated that the bloc’s economy would potentially come to a complete standstill by reducing interest rates by a quarter of a percentage point to 3.5%.
The US Federal Reserve is anticipated to begin reducing borrowing costs next week, coinciding with the ECB’s decision on Thursday to drop its benchmark deposit rate for the second time this year. Major Central Banks have started to reduce rates in reaction to signs that the greatest inflation increase in a generation is tapering off.
However, according to some analysts reached by the BrandSpur digital news platform, the ECB will probably lower interest rates once more at its two meetings this year. Inflation in the eurozone decreased from 2.6% in July to a three-year low of 2.2% in August.
There are worries that the Eurozone economy is slowing down following a brief spell of expansion early this year due to declining industrial output in Germany and Italy.
Since the central bank’s 2% inflation target may be threatened by rapid wage growth, some ECB policymakers are hesitant to lower rates too soon. Pay increases are stalling in the interim. In the first quarter, the ECB’s estimate of negotiated pay growth in the Eurozone increased by 4.7% annually; in the second quarter, that estimate decreased to 3.6%.
Following the decision, the euro remained stable at $1.101, and the benchmark for borrowing costs in the Eurozone, the interest-rate-sensitive two-year German Bund yield, continued to rise by 0.05 percentage points to 2.18%.
Bank President Christine Lagarde stated at her news conference following the decision that new data had verified: “Our confidence that we are heading towards our target in a timely manner.”
She commented on the forthcoming meeting on Oct. 17, saying: “I’m not giving you any commitment of any kind as far as that date is concerned.”
Continuing, she refrained from offering any advice on more reduction. According to her, the bank was “not pre-committing to a particular rate path,” and would decide on rates at each meeting based on newly received economic data.
However, to compensate for the purchasing power that was lost due to the explosion of inflation that followed the end of the pandemic, workers are pushing for higher pay, and policymakers need to keep a watch on simmering inflation among service industries.
