European Central Bank Cuts Interest Rates Again As Economy Slows

The European Central Bank (ECB) has reduced interest rates for the second time in recent months, aiming to lower borrowing costs as inflation eases and economic growth in Europe slows.

The benchmark rate for the 20 countries that use the euro has been lowered to 3.5%, down from 3.75%, following a unanimous decision by the ECB’s 26 policymakers.

The ECB first cut rates in June after five years of steady rates but left them unchanged in July.

With inflation now dropping to 2.2% in August, the lowest level in three years and close to the bank’s 2% target, the rate cut is seen as a response to the slowing economy.

Wage growth, which the ECB closely monitors, also slowed in the second quarter.

In a statement, the ECB said recent inflation figures were in line with expectations and kept its inflation forecast for 2024 at 2.5%.

However, the bank slightly reduced its growth projection for the eurozone, predicting the economy will grow by 0.8% this year, down from the 0.9% forecasted earlier.

“Financing conditions remain tight, and economic activity is still weak due to low private consumption and investment,” the ECB noted.

Concerns about the European economy are rising again after narrowly avoiding a recession last year.

Growth slowed in the April-to-June quarter, and Germany, the eurozone’s largest economy, saw its output shrink during that period.

A recent survey of businesses across the eurozone highlighted “economic fragility,” with new orders, employment, and business confidence weakening.

KPMG’s chief economist, Yael Selfin, wrote in a note that the eurozone’s growth has been below expectations and is likely to weaken further in the second half of the year.

Former ECB chief Mario Draghi also warned this week that Europe faces an “existential challenge” due to slowing growth and productivity.

He called for increased investment in innovation, suggesting that the European Union needs to invest €750-€800 billion more annually to remain competitive with the United States and China.

ECB President Christine Lagarde praised Draghi’s report, calling it a “formidable diagnosis” of Europe’s economic situation. She stressed the need for structural reforms to address the challenges outlined in the report.