Explained: Why European Central Bank cut interest rates again

ECB cuts interest rates: This marks the first time the ECB has implemented back-to-back rate cuts since it began its current cycle of easing in response to falling inflation rates.

In Short

• ECB cuts rates again as eurozone inflation cools rapidly.
• Interest rates drop to 3.25% after consecutive ECB cuts
• Analysts predict more ECB rate cuts amid eurozone economic weakness

The European Central Bank (ECB) has reduced interest rates once again, marking the second consecutive cut as inflation in the eurozone cools more rapidly than expected. On Thursday, the ECB lowered its benchmark deposit rate by a quarter-point, following a similar cut in September. This move brings the rate down to 3.25%, after peaking at 4%.

This marks the first time the ECB has implemented back-to-back rate cuts since it began its current cycle of easing in response to falling inflation rates. The latest decision came after September’s inflation data was revised downward, showing consumer prices in the eurozone rose by 1.7% year on year—slightly below the original estimate of 1.8%.

The ECB said the latest data confirmed that inflation is cooling as expected, with prices likely to increase in the coming months before returning to the central bank’s 2% target next year. The rate-setting committee met in Slovenia as part of its regular tour outside its Frankfurt headquarters, deciding to cut rates for the third time since the peak.

The ECB had previously raised rates aggressively in response to soaring inflation driven by the COVID-19 pandemic and Russia’s invasion of Ukraine. However, the recent lower-than-expected inflation numbers have reassured policymakers that prices are stabilizing. Additionally, signs of weakness in the eurozone economy have further prompted the ECB to ease borrowing costs, providing some relief to households and businesses.

"Recent surprises on the downside in economic activity indicators have increased confidence that inflation is headed toward the 2% target," the ECB stated. Analysts, such as ING’s Carsten Brzeski, believe the swift rate cuts indicate the ECB is more concerned about the eurozone’s growth outlook than before. There is now even a risk that inflation could undershoot the target, he warned.

Economists suggest that Thursday’s cut signals the ECB’s urgency to bring rates down quickly. Although the ECB is taking a cautious "data-dependent" approach, meaning it will assess economic conditions before deciding on future rate cuts, analysts expect more reductions are likely in the coming months.

Christine Lagarde, the ECB’s president, was expected to speak following the announcement, with her comments eagerly anticipated for hints on the future trajectory of interest rates. Some analysts predict the ECB may continue cutting rates until they fall to a "neutral" level of around 2% to 2.5% by mid-2025.