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European Central Bank cuts interest rate again

The European Central Bank has cut interest rates for a second time this year amid mounting concerns about a recession and receding inflation.
The central bank of the 20 countries that use the euro lowered its main deposit rate by a quarter point to 3.5 per cent from 3.75 per cent on Thursday. The move was widely expected and comes after the ECB began cutting rates in June.
The euro was broadly flat against the dollar following the announcement at $1.101, while the pan-European Stoxx 600 index climbed by 1.13 per cent, or 5.75, to 513.78. The FTSE 100 rose by 0.93 per cent, or 75.88, to 8,269.83.
The ECB said it would “continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction”. Its governing council said in a statement that it was “not pre-committing to a particular rate path”.
Christine Lagarde, president of the ECB, and the governing council had ratcheted up interest rates in Europe to an all-time high of 4 per cent to treat a surge in inflation, which reached a peak of nearly 11 per cent.
Russia’s invasion of Ukraine roiled European energy markets by curtailing gas supplies, turbocharging inflation in 2022 and 2023. Germany, Europe’s largest economy, had for decades relied on cheap Russian gas for manufacturing and industrial output. Inflation has fallen to 2.2 per cent.
The ECB said that the eurozone economy would grow by 0.8 per cent this year, 1.3 per cent in 2025 and 1.5 per cent in 2026, a slight downgrade compared to its June projections. Inflation is tipped to average 2.5 per cent this year and “should then decline towards our target over the second half of next year”, the central bank said.
The ECB has stolen a march on the Bank of England and US Federal Reserve in cutting interest rates, likely reflecting weaker growth in Europe compared to the UK and United States. It was the first major central bank to roll back policy in June.
Analysts are sceptical that the ECB will lower borrowing costs at its next meeting on October 17. Carsten Brzeski, global head of macro at ING, the Dutch bank, said: “The next rate cut looks likely in December, not October.”
Yael Selfin, chief economist at KPMG UK, said that if growth worsened “it will strengthen the case of more dovish policymakers to increase the pace of cuts in 2025 towards a terminal rate of around 2.25 per cent”.
The Federal Reserve is set to begin its rate-cutting cycle next Wednesday by loosening policy by a quarter-point. The federal funds rate is likely to fall by 1 percentage point this year from a range of 5.25 per cent to 5.5 per cent, according to market forecasts.
The Bank of England, on the other hand, is poised to leave the UK base rate on hold at 5 per cent at its meeting next Thursday. Andrew Bailey, the Bank’s governor, and four other members of its rate-setting panel clinched a slim 5-4 vote majority at the previous meeting to cut the base rate by a quarter point.

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