ECB cuts interest rates again as inflation cools

FRANKFURT – The European Central Bank cut its key deposit rate by 0.25 percentage point to 3.50 percent, responding to a drop in inflation and increasing signs of weakness in the eurozone economy over the summer.
The central bank offered few clues as to how much further it will ease policy over the rest of the year, saying rather that it “will continue to follow a data-dependent and meeting-by-meeting approach.”
The cooling economy – with the traditional powerhouse of Germany at risk of remaining stuck in recession this year – could certainly do with a little help from easier financing conditions.
However, ECB officials — even its dovish chief economist Philip Lane — have fretted that “the return to target is not yet secure.” While headline inflation has eased to 2.2 percent, services inflation has stuck above 4 percent and even accelerated in August.
New staff forecasts, which the ECB published at the same time as its decisions, showed no change to its inflation projections: it’s seen dropping to 1.9 percent in 2026. Growth forecasts were trimmed by 0.1 percentage point in each of the forecast years: to 0.8 percent in 2024, 1.3 percent in 2025 and 1.5 percent in 2026.
ECB President Christine Lagarde will shed more light on the Bank’s interpretation of the forecasts at her press conference, which starts at 2:45 p.m. CET.  Markets will be looking to see whether she encourages or pushes back against current expectations that the Bank will cut again at its next meeting in October.
Politicians of various stripes have already expressed concern that the Bank risks falling ‘behind the curve’ as the economic slowdown in the U.S. and ongoing problems in China take their toll on the eurozone.
“The ECB tends to be too cautious too often,” said Markus Ferber, the most senior MEP from the center-right EPP grouping on the European Parliament’s economic and monetary affairs committee. “Lagarde was late when it came to raising rates when inflation was running hot. Now, there is a chance that the ECB repeats the same mistake on the side of the cycle.”
For some, however, expectations for a cut in October are too ambitious. In a note before the decisions, UBS Global Wealth Management chief economist Paul Donovan said Lagarde “is likely to signal a steady pace of rate cuts: a quarter-point a quarter seems appropriate.”
“With wage growth far outpacing productivity and service inflation picking up again, the Governing Council has no reason to accelerate the pace of cutting rates or committing to further rate cuts at this stage,” S&P Global analyst Sylvain Broyer said in e-mailed comments.
The decisions were as expected by the market, and neither the currency nor bond markets reacted initially. By 1:35 p.m. CET, the euro was up 0.1 percent against the dollar at $1.1025.
In addition to cutting the deposit rate, the ECB adjusted its main refinancing and marginal lending rates, to 3.65 and 3.90 percent, respectively, delivering on a previously announced decision to narrow the spread between the rate on its official facilities. This is a technical move that is not expected to have an impact on market rates on the near-term.
(CORRECTION: The initial version of this story misstated the year in which inflation is expected to fall below 2 percent. The article has also been updated with additional comment and market reaction. )