ECB makes 25 bps rate cut as inflation drops to three-year low

ECB's third rate cut this year aims to boost sluggish eurozone growth.

Key Takeaways

• ECB's rate cut follows a significant drop in inflation to 1.8%.
• Further rate reduction anticipated by markets by December.

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The Euro Central Bank (ECB) decided to cut interest rates by 25 basis points during its monetary policy meeting today, lowering the key rate from 3.5% to 3.25%. This is the bank’s third rate reduction this year, coming after September’s inflation rate dropped to a three-year low of 1.7%, below the initial estimate of 1.8%.

The ECB’s decision was widely expected as inflation rates, including headline inflation and core inflation, in the eurozone have been declining. Since September’s inflation fell below the bank’s target of around 2%, there has been less pressure to raise interest rates to curb price increases.

In addition, ahead of the meeting, several ECB officials, including President Christine Lagarde and Bank of France Governor Francois Villeroy de Galhau, hinted at the possibility of a rate cut. Lagarde expressed confidence “that inflation will return to target in a timely manner.”

The ECB made its first rate cut in June, reducing its benchmark interest rate from 4% to 3.75%. Following that, the second reduction brought the rate down to 3.5% in September. Financial markets are pricing in another 25-basis-point rate cut to 3% in December after today’s decision.

Economic concerns are also among the factors driving the ECB’s decision. The eurozone economy is experiencing sluggish growth, with third-quarter GDP forecast to be stagnant.

Tight monetary policy and structural issues are contributing to the slowdown. Lower interest rates can stimulate economic activity amid growth challenges, cooling labor markets, and geopolitical risks.

The decrease in interest rates is expected to stimulate economic growth and positively impact traditional equity markets. This, in turn, could boost investor appetite for riskier assets like Bitcoin.

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