Inflation is on track to hit the medium-term 2% target in 2025. The ECB remains data-dependent, with no pre-commitment to future rate changes.
In a press conference following the European Central Bank’s (ECB) decision to cut interest rates by 25 basis points, President Christine Lagarde hailed the central bank’s progress in tackling inflation, declaring figuratively: “We’re breaking the neck of inflation.”
The deposit facility rate, the rate at which the ECB steers monetary policy, has now fallen to 3.25%, marking the lowest level since May 2023.
Why the ECB decided to cut interest rates
Lagarde highlighted several key factors that drove the ECB’s decision to cut rates in October.
“The incoming information on inflation shows that the disinflationary process is well on track,” Lagarde said.
Headline inflation fell to 1.7% in September, the lowest level since April 2021, and core inflation, which excludes volatile items like food and energy, dipped to 2.7%.
A softer-than-expected economic outlook also contributed to the decision.
“The inflation outlook is also affected by recent downside surprises in indicators of economic activity,” she explained, referencing weaker industrial production, worsening business survey indicators and slower household consumption in the euro area.
When asked why the ECB opted for a 25 basis point cut instead of a more aggressive 50 basis points given the worsening economic outlook, Lagarde explained that the decision was based on careful assessment of economic indicators, which, while pointing to disinflation, did not justify a larger cut at this stage. She also added that it was unanimous.
Despite the cut, the ECB’s stance remains cautious on future adjustments.
“We will not pre-commit to any particular rate path,” she said, emphasising that the central bank would analyse all available data between now and December before deciding the next steps.
However, she left the door open for further action, saying that the ECB would make necessary adjustments if incoming data confirmed persistent risks. “If the data continues to point in the same direction, we will act accordingly, but we remain flexible and open,” she stated.
ECB seems more worried about growth than inflation
Pressed on whether the ECB’s focus had shifted from inflation to growth, given the weaker economic data, Lagarde stated: “We are concerned about growth to the extent that it has an impact on inflation.”
Inflation is expected to rise in the coming months, partly due to base effects related to energy prices, before declining towards the ECB’s 2% target next year.
Lagarde acknowledged that risks to inflation remain, both on the upside and downside.
Lagarde also addressed concerns about rising global uncertainties, particularly the impact of conflicts in the Middle East and Ukraine.
She acknowledged the risks of higher energy prices and disrupted trade, but reassured the audience that the ECB was prepared to adjust its policies if necessary.
“Any hardening of barriers, tariffs, or obstacles to trade will have a downside impact on an open economy like the eurozone,” she cautioned, while maintaining that the ECB remains flexible and responsive to evolving conditions.
Market reactions: Euro falls below 1.0850, European stocks rally
The euro fell 0.3%, dipping below 1.0850 against the US dollar on Thursday, marking its lowest level since early August.
In the eurozone bond market, sovereign yields saw slight declines in shorter-dated maturities, while longer-term yields remained largely stable.
European stocks, however, surged in response to the ECB’s rate cut. The Euro STOXX 50 index climbed 0.8% to 4,950 points.
France’s CAC 40 led the gains, advancing 1.4% to 7,592 points, boosted by strong performances from Airbus (+4%), Schneider Electric (+3.2%), and Carrefour (+2.7%).
Germany’s DAX extended its record highs, gaining 0.8% to reach 19,580 points. Notable gainers included Sartorius, which surged nearly 15%, and Merck, up 7%.
