European Central Bank cuts interest rates for third time since June

LONDON, U.K.: The European Central Bank (ECB) lowered interest rates for the third time since June, reducing its benchmark rate to 3.25 percent, as inflation across the 20-country eurozone fell to its lowest in more than three years.

Despite concerns about weakening economic growth, the ECB remains optimistic that the bloc will avoid a recession.

The decision was made during a meeting in Ljubljana, Slovenia, rather than the ECB's usual headquarters in Frankfurt, Germany. The central bank stated that the "disinflationary process is well on track," as inflation dropped to 1.7 percent in September, below the ECB's target of two percent for the first time in three years.

While inflation is expected to rise slightly in the coming months, ECB President Christine Lagarde predicted it would return to the two percent target by next year. However, she emphasized that the ECB is not committing to any specific rate path, stating that decisions will be made based on incoming data.

Lagarde also acknowledged weaker-than-expected economic activity, citing a contraction in the manufacturing sector and softer exports. Germany, the eurozone's largest economy, saw a slight decline in output during the second quarter.

Despite these challenges, Lagarde expressed confidence that the eurozone would not fall into recession, though she cautioned about potential risks from geopolitical tensions in the Middle East and possible U.S. tariffs under a future Trump presidency.

"Based on the information we have, we do not see a recession," Lagarde said.

Economists believe the growing evidence of an economic slowdown, particularly in Germany, may increase pressure on the ECB to consider further rate cuts. Some, like GianLuigi Mandruzzato of EFG Asset Management, expect more reductions starting in December to support growth by lowering borrowing costs.

To combat high inflation, the ECB has aggressively raised interest rates since mid-2021, peaking at four percent in September 2023. However, the impact of these rate hikes has slowed growth across the region.

Globally, central banks, including the U.S. Federal Reserve, have similarly raised rates to tackle inflation, which surged due to supply chain disruptions and the effects of the war in Ukraine.

With inflation now easing-down to 2.4 percent in the U.S. and 1.7 percent in the U.K.-many central banks are beginning to reduce borrowing costs to support economic growth.