A third consecutive interest rate cut has been announced by the European Central Bank (ECB) in an effort to combat a slowdown in the euro area.
The bank’s governing council indicated that while progress in the fight against inflation was evident, it was also taking action to boost weakening demand in the 20 nations using the euro.
The main lending rate was reduced by a quarter point to 3%, marking the fourth cut this year.
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The council’s statement stated: “Staff now anticipate a slower economic recovery compared to the projections in September.
“Although there was growth in the third quarter of this year, indicators show a slowdown in the current quarter.
“Staff predict economic growth of 0.7% in 2024, 1.1% in 2025, 1.4% in 2026, and 1.3% in 2027.
“The expected recovery is mainly dependent on increasing real incomes, which should lead to higher household consumption, and companies ramping up their investments.
“Over time, the easing effects of tight monetary policy should support an increase in domestic demand.”
The pound, which had hit an eight-year high against the euro on Wednesday, remained elevated following the council’s announcement.
There was no indication that the pace of interest rate cuts would slow down.
Sterling was trading at €1.2134 – slightly up after the update, which was in line with expectations from economists and market participants.
Much of the recent strength of the pound can be attributed to the constant rate reductions by the ECB, while the Bank of England is expected to maintain a more gradual approach next year.
Local currencies tend to strengthen when interest rates are higher as they increase returns for investors in government bonds.
Michael Brown, strategist at Pepperstone, commented before the ECB decision: “A decline in euro-sterling makes sense.
“The economic outlook in the UK is bleak, but it seems even worse in the eurozone.
“There are also significant political uncertainties in France and Germany.”
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Germany, the largest economy in Europe, is set for snap elections in February, facing a decline in demand for orders from abroad and tough competition.
There is also a looming threat of further damage from trade tariffs imposed by Donald Trump when he begins his second term in the White House next month.
In France, activity has been impacted by a political deadlock that has raised concerns about the country’s financial management abilities.
The country has yet to agree on a budget for 2025.
As a result of challenges led by France and Germany, analysts predict that the ECB will continue to cut rates at every meeting in the first half of next year.