The European Central Bank has cut its headline interest rate by a quarter of a point to 3.25% after inflation in the eurozone fell below its 2% target.
ECB policymakers were under pressure to reduce the deposit rate after figures out earlier on Thursday showed annual prices growth in the single-currency bloc had eased in September to 1.7%, down from 2.2% the previous month.
The cut is the ECB’s first back-to-back interest rate cut in 13 years and its third of 2024. That puts it two ahead of the Bank of England, which is widely forecast to cut the cost of borrowing in the UK by 0.25 percentage points from the current level of 5% when its monetary policy committee meets again next month.
In the US, the Federal Reserve has indicated it is also minded to trim rates in the coming months, although there have been hints it may skip a cut at next month’s meeting.
Announcing the decision, the ECB said the reduction in interest rates was based on “an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission”.
It added: “The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity.”
The deposit rate sets the return paid to eurozone banks when they make overnight deposits with the Eurosystem.
ECB president Christine Lagarde said the figures showed the eurozone economy was weaker than previously expected.
“The latest data is all heading in the same direction, downwards, and points to more sluggish growth,” she said.
Joe Nellis, an economist at Cranfield University and an adviser to the financial consultancy MHA, said the ECB would be focused on promoting growth after a long period in which the cost of borrowing was kept high to combat inflation.
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“Unlike the Bank of England, the ECB has a dual mandate, requiring it to take decisions to foster growth as well as control inflation. ECB policymakers will hope that this cut provides a boost to the German (and wider eurozone) economy, inspiring consumer spending, encouraging investment, and ultimately stimulating the economy,” he said.
“With the German economy likely to shrink for its second consecutive year, we can expect the ECB to cut rates by another 0.25% in December – this is a decision policymakers will feel they have to make if they are serious about catalysing growth in the eurozone’s largest economy,” he added.
Gold reached a record high just before the announcement, hitting $2,688.82 (£2,065.26) an ounce for the first time, lifted by forecasts of interest rate cuts around the world and uncertainty ahead of next month’s US election.