Key takeaways
- The ECB rate cut comes after a significant drop in inflation to 1.8%.
- Markets expect a new rate cut in 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 official interest rate from 3.5% to 3.25%. This is the bank’s third rate cut this year, after September’s inflation rate fell 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 inflation fell below the bank’s target of around 2%, there has been less pressure to raise interest rates to curb price increases.
Additionally, ahead of the meeting, several ECB officials, including President Christine Lagarde and Bank of France Governor Francois Villeroy de Galhau, implied given the possibility of a rate cut. Lagarde expressed confidence “that inflation will return to its target in a timely manner.”
The ECB made its first rate cut in June, reducing its benchmark interest rate from 4% to 3.75%. The second reduction then took the rate to 3.5% in September. Financial markets are pricing in another 25 basis point rate cut to 3% in December following today’s decision.
Economic concerns are also among the factors driving the ECB’s decision. The eurozone economy is experiencing slow growth and third quarter GDP is expected 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 decline in interest rates is expected to stimulate economic growth and have a positive impact on traditional stock markets. This, in turn, could increase investor appetite for riskier assets like Bitcoin.
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