Frankfurt, Sep 13 (IANS): The European Central Bank (ECB) on Thursday decided to cut its policy rate by 25 basis points, a sign to scale back the restrictive monetary policy.
The rate cut, the second of its kind since June, came at a time when the central bank is not ready to drop its guard against inflation but expects a gloomier economy in the euro area this year.
The inflation in the euro area dropped to 2.2 percent in August from 2.6 per cent in July, according to the flash estimate published by the statistical office of the EU.
The latest inflation reading, slightly higher than the medium-term target of the ECB, has not brought relief to the central bank, which is sticking to its June forecast about inflation in the bloc in the September staff projections.
The ECB staff see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026, Xinhua news agency reported.
The drop of energy prices played a predominant role in bringing down the inflation in the euro area in August. While other factors registered little change, energy prices went down by 3 percent in August.
Meanwhile, domestic inflation remains high as wages are still rising at an elevated pace. Heightened geopolitical tensions could push up energy prices and freight costs in the near term and disrupt global trade, the ECB warned.
"We are determined to ensure that inflation returns to our two percent medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim," it said.
Given that latest data broadly confirmed the ECB's previous projections about the development of inflation in the euro area, its decision to cut interest rates, as analysts observed, can be mainly attributed to the bleaker economic prospect.
The economy in the euro area grew by 0.2 per cent in the second quarter, down from 0.3 per cent in the first quarter. The weaker-than-expected growth was attributed to weakened private consumption, dampened business and housing investment.
In an unprecedented move, the ECB raised key interest rates by 450 basis points for 10 consecutive times since July 2022 and pushed them to the historically highest levels by September 2023.
The aggressive tightening has weighed on demand, bank lending and investment to the point where the ECB becomes alert that "growth could also be lower if the lagged effects of monetary policy tightening turn out stronger than expected."
In its latest projections published on Thursday, the ECB staff expect the economy to grow by 0.8 per cent in 2024, 1.3 percent in 2025 and 1.5 per cent in 2026.
ECB president Christine Lagarde insists that the central bank is not recommitted to a rate path and will remain data dependent to decide on its future course of action when it comes to rate cuts.
As the next staff projections are due in December, the "ECB will probably also want to bank on something when taking the next rate decision," which is likely in December, said Carsten Brzeski, global head of Marco division of ING Research, in a note.
The ECB will be pressured to act more aggressively to cut rates unless the projections about the euro area economy improving later this year materialize.
Brzeski considers it "a matter of time before a bleaker growth outlook will translate into more aggressive rate cuts," citing the central bank's structural "overestimating the timing and the strength of the eurozone economy."
"Looking ahead, we expect the ECB to eventually step up the pace of further rate cuts," he said.