The central bank has cut interest rates for the second time this year.

The European Central Bank cut its deposit facility rate, as it calls its key borrowing rate, by 0.25 per cent, or 25 basis points, to 3.5 per cent. As inflation figures have weakened in the region – a pattern seen in most countries – the autumn/winter months appear to be set for more possible easing. The central bank also cut its 2024 growth forecast to 0.8 per cent from an earlier forecast of 0.9 per cent.

As the ECB said in March, the gap between the interest rate on the main refinancing operations and the deposit facility rate will be set at 15 bps. The spread between the rate on the marginal lending facility and the rate on the main refinancing operations will remain unchanged at 25 bps.

The interest rates on the main refinancing operations and the marginal lending facility will fall to 3.65 per cent and 3.90 per cent respectively. 

Here are reactions from wealth managers:

Kevin Thozet, a member of the investment committee at Carmignac 
Weak economic growth, lower wage inflation data and contractionary leading indicators all hint at a further decrease in inflation across the euro area. Yet, services and domestic inflation – stubbornly stuck in the region of 4 per cent – weigh against it, or at least entertain some form of doubt on the path ahead.

A 0.25 per cent cut was the plan, but Lagarde is avoiding committing to a monetary policy path. And with the Frankfurt institution revising its 2024 inflation projections on the upside and growth expectation to the downside, we don’t expect clarity soon. Data dependency remains central.

Stefan Gerlach, chief economist at EFG Bank in Zurich and a former deputy governor of the Central Bank of Ireland, 2011 to 2015
The process of relaxing monetary policy that it started in June is continuing. The speed of reducing interest rates will be slow and will depend on how quickly inflation declines towards the ECB’s 2 per cent target. While growth is weakening, inflation pressures remain too high and are persistent. Services inflation is a particular concern. The risk that inflation will rise remains. 

The Governing Council is data-dependent and will want to see how inflation responds to this cut before considering additional cuts. There is no reason to presume that the ECB will cut interest rates again in October. 

The ECB is likely to cut interest rates in December unless the data worsens sharply. Changing interest rates at meetings when projections are released is helpful because it makes it easy to explain policy decisions.

Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International
Although growth remains weak, as we are picking up from the signal in our activity trackers, the ECB remains more focused on inflation, which is its single mandate, and that has remained sticky, particularly due to elevated wages and services inflation. 

We see the next opportunity to assess this stance to be in December when the ECB has better visibility on wage growth in Q3 2024. Accordingly, we expect the next 25 bps cut to come in December, with the ECB likely staying on hold in October, which is more hawkish than the market is pricing. 

David Goebel, associate director of investment strategy, Evelyn Partners
The ECB’s decision to cut rates comes amid concerns over sluggish growth. The most recent figures reveal that eurozone GDP grew by only 0.2 per cent over the second quarter, down from 0.3 per cent over the preceding quarter, disappointing expectations that growth would be maintained at that level. 

Correspondingly, inflation has looked soft, with the most recent preliminary figure for August CPI coming in at 2.2 per cent, down from 2.6 per cent in July. Wage growth has been a focus for the ECB, and has decelerated significantly in Germany, to 3.1 per cent in the second quarter from 6.2 per cent in the first. Clearly this gives the ECB room to act without exacerbating inflation risks, but there are still areas of concern. Services inflation remains stubborn, with the most recent reading at 4.2 per cent on an annualised basis, due in particular to rising hospitality prices and holiday costs.

Despite these concerns, the cutting cycle is expected to continue with another 25 bps rate cut in October or December, and nothing in today’s statement would lead us to think otherwise.