ECB cuts interest rates for second time as inflation continues to slow

The European Central Bank (ECB) cut interest rates for the second time in four months on Thursday as inflation slowed and the euro zone economy struggled to gain momentum.

The Frankfurt-based central bank trimmed its key lending rate, the one that affects mortgage rates, by 25 basis points to 4 per cent.

Having assessed the inflationary outlook, “it is now appropriate to take another step in moderating the degree of monetary policy restriction,” the ECB said.

The bank, however, warned that the fight against inflation was far from over, with price pressures, particularly in the services sector, remaining high.

Despite markets pricing in at least one more rate cut this year and a sequence of four next year, the ECB insisted that future rate moves remained uncertain and would depend on incoming economic indicators.

“We are not pre-committing to a particular rate path,” ECB president Christine Lagarde said, while repeating her mantra that future decisions would be “data-dependent”.

The bank’s latest quarter-point reduction will reduce the monthly repayments on every €100,000 of tracker mortgage debt by €12 to €13. That means the average tracker customer with €200,000 remaining over 10 or 15 years will save around €25 a month.

Tracker mortgage holders are also expected to benefit from bank’s move to cut the spread between its refinancing and deposit rates by 0.35 per cent later this month.

This will potentially increase the savings for tracker holders with €200,000 left on their mortgage to €70 a month or €840 a year.

The ECB confirmed its main refinancing rate would be decreased to 3.65 per cent from September 18th. AIB said it would apply tracker mortgage rate adjustments in line with ECB policy and its contractual obligations to customers.

[ ECB rate cut: what does it mean for tracker mortgage holders and variable rate mortgage holders?Opens in new window ]

The move will benefit the State’s 200,000 plus tracker mortgage holders immediately but as managing director of finance broker Doddl.ie Martina Hennessy said “the vast majority of mortgage holders in Ireland do not have a tracker rate” but will be hoping Irish lenders will follow suit in passing on the reduced rates.

In its statement, the ECB said it remained determined to ensure that inflation returns to its 2 per cent medium-term target and would keep policy rates “sufficiently restrictive for as long as necessary to achieve this aim”.

While it sees inflation across the bloc averaging 2.5 per cent this year, falling to 2.2 per cent in 2025 and below its 2 per cent target level in 2026, it warned that price growth was expected to temporarily rise again in the latter part of this year, “partly because previous sharp falls in energy prices will drop out of the annual rates”.

The bank also revised up its projections for core inflation, which strips out volatile food and energy prices, in 2024 and 2025 noting services inflation had been higher than expected.

While domestic inflation was still too high on account of strong wage growth “labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation,” it said.

It said financing conditions across Europe remain restrictive with economic activity “still subdued, reflecting weak private consumption and investment.”

It projected the euro zone economy would grow by 0.8 per cent in 2024, which is a downgrade on its previous forecast, rising to 1.3 per cent in 2025 and 1.5 per cent in 2026.

The projection comes in the wake of downward revisisons to euro zone growth in the second quarter and a contraction in Germany’s output, which has raised fears of recession.

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