ECB’s Strategic Shift: Rate Cuts Amid Cooling Inflation and Economic Uncertainty

In a pivotal move, the European Central Bank (ECB) has once again cut interest rates as inflation cools and economic challenges persist. This marks the second rate reduction in 2024, with the deposit rate lowered by 25 basis points to 3.5%. Despite these actions, ECB President Christine Lagarde stressed that future rate decisions will rely on incoming data, highlighting the uncertainty surrounding the economic outlook. Alongside these rate cuts, the ECB has downgraded its growth projections, reflecting weaker household consumption and a struggling manufacturing sector. As inflationary pressures from wage growth ease, concerns about rising service-sector prices remain. With more rate cuts likely in 2025, analysts anticipate further adjustments as the ECB navigates a delicate path toward recovery.

The European Central Bank (ECB) has cut interest rates for the second time in 2024, lowering the deposit rate by 25 basis points to 3.5% as inflation moves closer to its 2% target. Despite this reduction, ECB President Christine Lagarde emphasized that future rate decisions will be data-dependent, with no predetermined path for further cuts. The ECB also revised its growth forecasts downward, predicting slower economic expansion through 2026, citing weak household consumption and a struggling manufacturing sector. While inflationary pressures from wage growth are easing, service-sector price increases remain a concern. Analysts expect additional rate cuts into 2025, with some predicting the deposit rate could reach 2% by mid-2025.

On September 12, 2024, the European Central Bank (ECB) lowered the deposit facility rate by 25 basis points to 3.5% as part of its ongoing effort to moderate the restrictive stance of monetary policy. The interest rate on the main refinancing operations was also reduced to 3.65%, and the marginal lending facility rate decreased to 3.90%. These changes will take effect from September 18, 2024.

The ECB’s decision was influenced by updated inflation projections, which remain consistent with earlier forecasts. Inflation is expected to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, with core inflation slightly revised upward for 2024 and 2025 due to persistent services inflation.

While domestic inflation remains high due to rising wages, labor cost pressures are easing. The ECB also revised its economic growth outlook slightly downward, projecting GDP growth of 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026. The central bank will maintain a data-driven approach to rate decisions to ensure inflation returns to the 2% target over the medium term.

Additionally, the ECB confirmed adjustments to its asset purchase programs (APP), including winding down reinvestments under the pandemic emergency purchase program (PEPP) by the end of 2024. The Governing Council remains prepared to adjust its policy tools to ensure price stability and the smooth transmission of monetary policy across the eurozone.

In the second quarter, the economy grew by 0.2%, down from 0.3% in the first quarter, falling short of projections. Growth was primarily driven by net exports and government spending, while private domestic demand weakened due to reduced household consumption and business investment. Services contributed positively, but industry and construction declined. Despite challenges, the recovery is expected to strengthen as real incomes rise and global demand boosts exports.

The labor market remains stable, with the unemployment rate at 6.4%, though employment growth slowed to 0.2%. Survey data suggests further moderation in labor demand, with job vacancies returning to pre-pandemic levels.

After reaching a high of 1.12000, the EURUSD chart showed signs of weakening as bulls struggled to maintain upward momentum. A bearish reversal pattern, known as a Bearish Tower, formed, followed by a failure swing where the peak at 1.11539 did not surpass the previous high. Prices then dropped below the trough of 1.10251, signaling further bearish sentiment. Technical indicators, including the 20-period Exponential Moving Average (EMA), Momentum oscillator, and Relative Strength Index (RSI), support this outlook, with prices falling below key thresholds. Using Fibonacci Retracement, potential support levels are estimated at 1.09470, 1.08167, and 1.06083.

In conclusion, the European Central Bank’s decision to cut interest rates for the second time in 2024 reflects its efforts to tackle easing inflation and economic challenges. With future rate cuts likely dependent on incoming data, the ECB remains cautious about the economic outlook, particularly with slower growth and persistent service-sector price increases. As the central bank navigates these issues, further rate adjustments are expected into 2025, aiming to stabilize inflation and support economic recovery across the eurozone.