ECB Cuts Rates ... What Next For The MPC ...

This week, the European Central Bank made its first back-to-back interest rate reduction in more than a decade, reducing its key rate by 25 basis points in an effort to support the eurozone’s weakening economy.

The bank lowered the main deposit rate to 3.25 per cent from 3.5 per cent in the third cut this year reducing the cost of borrowing from a record high of 4 per cent.

The move came after a range of data reinforced concerns that the EU's major economies are struggling. Germany, is projected to expand by just 0.1 per cent this year, according to the OECD. The Eurozone economy as a whole is expected to grow by 0.7 per cent.

“Manufacturing and exports are weak. Firms are not investing much. Services have been doing a bit better, thanks to a good summer tourism season. Even though many people have more money to spend, they are preferring to put it aside, even more so than before the pandemic.” The ECB said. “”The saving rate stood at 15.7 per cent in the second quarter, well above the pre-pandemic average of 12.9 per cent.”

Inflation across the twenty nations fell to 1.7 per cent in September from 2.2 per cent the previous month, below the ECB’s target. Wage pressures, often singled out as a source of inflationary concern, have also cooled more quickly than expected.

In a statement announcing the latest rate reduction, the governing council stated: “The incoming information on inflation shows that the disinflationary process is well on track.”

“We're breaking the neck of inflation,” Christine Lagarde said in the Slovenian capital of Ljubljana as she announced that the European Central Bank was cutting interest rates. “It’s not broken completely yet, but we’re getting there.”

Markets now see a high chance of rates being lowered by a further 25 basis points in  December. The ECB is leading the way in comparison with  the Fed and the Bank of England. The Euro is paying the price.