Inflation is close to target, while the economy is close to recession, causing Europe to continue to cut interest rates after 3 months.
At its meeting on September 12, the European Central Bank (ECB) announced a further 25 basis point (0.25%) reduction in its deposit rate to 3.5%. Inflation in the region remains on track to hit its 2% target, but the economy is on the brink of recession.
The move was in line with investor expectations. It was the second time this year that the ECB has cut interest rates. In June, the bank cut rates for the first time in five years, by 25 basis points.
Investors are now focused on the European Central Bank’s upcoming plans, but the agency has not provided further details.
“The Governing Council will take its decisions based on the data available at each meeting. We are not committing ourselves to any specific course,” the ECB said in a statement. Economists say the agency could cut rates again in October and December.
Pro-QE officials at the ECB say the risk of recession is rising and that keeping interest rates high is holding back growth more than necessary.
In contrast, officials concerned about inflation say the labor market remains overheated. Price pressures persist, especially in the service sector.
Eurozone inflation was 2.2% in August, the lowest in three years. However, GDP grew by just 0.3% in the second quarter compared to the same period last year, the same pace as in the first quarter. The eurozone fell into recession in the second half of last year.
Europe is behind the US in raising interest rates, but ahead in cutting them. The US Federal Reserve (Fed) is expected to ease monetary policy at its policy meeting next week.