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The ECB cuts interest rates again, but the Eurozone economy is stagnating

2024-10-18 11:21:43Biznes SHKRUAR NGA REDAKSIA VOX

The ECB cuts interest rates again, but the Eurozone economy is stagnating

The European Central Bank cut interest rates for the third time this year, noting that inflation in the eurozone is now increasingly under control and the economic outlook has worsened.

The first time in 13 years that rates have been cut twice in a row, it marks a shift in focus for the European Central Bank (ECB) from reducing inflation to protecting economic growth, which has lagged well behind that of the United States for two years in a row. .

The latest economic data is likely to have tipped the balance within the ECB in favor of a rate cut, with surveys of business activity and confidence, as well as the inflation reading for September, all slightly lower than was expected.

The decrease means that the rate that the ECB pays for bank deposits is reduced to 3.25%.

Inflation and growth

The ECB has eased the worst period of inflation in at least a generation.

Prices rose just 1.7% last month, falling below the bank's 2% target for the first time in three years. While inflation may go above 2% by the end of this year, it is expected to hover around this level for the foreseeable future.

The ECB noted that wage increases were still supporting "domestic inflation" — which is the increase in the price of services and goods that are not heavily dependent on imports — but that too was falling.

However, the economy has had to pay a high price for this.

High interest rates have dampened investment and economic growth, which has been weak for nearly two years.

A remarkably resilient labor market is now starting to show some cracks, with the job vacancy rate – or the share of vacancies as a share of the total – falling from record levels.

This has prompted calls within the ECB to ease policy before it is too late.

Part of this weakness is due to structural problems, such as high energy costs and low competitiveness that hamper Europe's industrial powerhouse, Germany.

These issues cannot be fixed through lower interest rates alone, although they can help the margin by making capital cheaper. 


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