European Central Bank (ECB) president Christine Lagarde all but declared victory over inflation on Thursday as Frankfurt reduced interest rates for the third time this year and for a second straight meeting with the focus shifting away from price growth and more towards Europe’s flagging economy.
“We’re breaking the neck of inflation,” she told reporters at the ECB’s post-meeting press conference.
“The incoming information on inflation shows that the disinflationary process is well on track,” Ms Lagarde said while noting that headline price growth across the euro area fell to a lower-than-expected 1.7 per cent in September, below the ECB’s target rate of 2 per cent.
The postive read on prices prompted the ECB to trim its key deposit rate by 25 basis points to 3.25 per cent, a move that had been widely anticipated by markets and one that will be welcomed by borrowers here.
Ms Lagarde linked the ECB’s decision to cut rates to the deteriorating economic outlook with growth across the bloc forecast to slow to just 0.2 per cent in the third quarter.
“The inflation outlook is also affected by recent downside surprises in indicators of economic activity,” she explained, referencing weaker industrial production, worsening business survey indicators and slower household consumption in the euro area.
Asked why the ECB had not opted for a more aggressive half point cut given the worsening economic outlook, Ms Lagarde said that the unanimous decision was based on a careful assessment of economic indicators, which did not justify a larger cut at this stage.
While the ECB chief stuck to her mantra that future rate decisions would be data dependent, the slowdown in activity, driven in part by a manufacturing slump in Germany, increased speculation that Frankfurt would increase the pace of rate cuts in the coming months to halt the decline.
[ ECB’s latest rate reduction will help borrowers but egg on house pricesOpens in new window ]
Several analysts predicted the ECB would now reduce rates at every meeting through to next March in an effort to arrest the fall-off in activity.
“Given the loss in growth momentum and the moderation in inflation we now expect the ECB to cut rates by 25 basis points at each of the upcoming four meetings,” UBS economist Reinhard Cluse said.
Despite the clouding economic outlook, Ms Lagarde told the post-meeting press conference in the Slovenian capital Ljubljana that she believed the euro zone economy was still on course for a soft landing.
“Are we still on a soft landing expectation? The answer is, on the basis of the information that we have, we certainly do not see a recession...so the euro area on the basis of what we have is not heading for recession,” she said, while noting there were downside risks to that forecast not least from geopolitical tensions in the Middle East.
[ ECB rate cut: what’s in it for me?Opens in new window ]
According to Eurostat figures, released ahead of the ECB’s rate decision, inflation across the bloc slowed more than expected in September.
Consumer price growth moderated to 1.7 per cent last month from 2.2 per cent the previous month. An initial flash estimate, published earlier this month, put inflation at 1.8 per cent.
Ireland was estimated to have the lowest inflation rate, as measured by the harmonised index of consumer prices (HICP), of any euro zone state at 0.0 per cent down from a previous estimate of 0.2 per cent.
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