The European Central Bank (ECB) cut interest rates for the third time this year on Thursday in response to slowing economic growth, some softening in a previously strong labor market, and easing consumer price pressures.
The ECB cut its deposit interest rate by 25 basis points to 3.25% as forecast in a Reuters poll of analysts, in an acknowledgment that inflation may reach its 2% target sooner than previously expected.
However, the ECB central bank gave no new indication of its next steps, although markets expect similar cuts at each subsequent meeting, which would bring rates from growth-limiting levels to at least neutral levels by the end of next year.
"The latest information on inflation shows that the disinflation process is well under way," the ECB said in a statement. "Inflation prospects are also affected by the shock of the recent decline in indicators of economic activity."
The reduction had been widely expected after policymakers had argued for faster policy easing ahead of the meeting, based on some weak growth data and steady inflation data.
Weak sentiment indicators, low consumer spending and a lingering industrial slowdown suggest the bloc is barely growing, which will put downward pressure on inflation, which fell to 1.7% last month, the lowest level in three years.
"Domestic inflation remains high, as wages are still rising at a high rate. At the same time, labor cost pressures are expected to continue to ease gradually, with gains partly absorbing the impact on inflation,” the ECB added.
However, advocates of tighter policy may still oppose a rapid rate cut as inflation is likely to pick up in the coming months.
The labor market remains tight, unions continue to demand substantial wage increases, energy costs are volatile, and service prices are still rising rapidly, suggesting domestic inflation may remain relatively high for a longer period.
However, policymakers who support policy easing argue that growth is now so weak that if the ECB does not act quickly to support the bloc, inflation may fall below target and the ECB will have to shift from dealing with rapid price increases to too low inflation.
