The weak economy urgently needs to be stimulated by the ECB to announce the third rate cut in the year

The Zhitong Finance App learned that the ECB cut interest rates for the third time this year, and the accelerated decline in inflation has enabled it to support the Eurozone's faltering economy.

On Thursday, the ECB cut the key deposit interest rate by 25 basis points to 3.25%, in line with all analysts' expectations. The ECB said the process of controlling prices was “on the right track,” but did not provide any clue as to when or how fast it will continue to reduce borrowing costs.

The ECB said in a statement, “To achieve this goal, we will maintain a sufficiently strict policy interest rate for as long as necessary. The Management Committee will continue to follow a data-dependent, meeting-by-meeting approach to determine the appropriate level and duration of restrictions”.

Thursday's move accelerated the pace at which officials lifted the Eurozone's economic shackles. Earlier data showed that the Eurozone inflation rate fell below 2% for the first time since 2021, while private sector activity was weak, and the flexible job market so far also showed cracks.

Moreover, there are more dangers lurking further afield: hostilities in the Middle East and the tariff policies that may accompany Trump's re-election as US President all have the potential to erode market confidence. After the Federal Reserve began its own easing cycle, policymakers are also watching the Federal Reserve.

ECB President Lagarde told European lawmakers this month, “The latest developments have strengthened our confidence that inflation will return to target levels in a timely manner.” This statement sent the clearest signal that the ECB will cut interest rates again.

Even some hawks acknowledged the heightened economic risks. Executive Committee member Isabel Schnabel said that officials “cannot ignore factors that are not conducive to economic growth.”

Prior to her remarks, private sector output contracted for the first time since March as manufacturing difficulties deepened and services slowed. Analysts lowered their forecasts for the Eurozone's third and fourth quarters, as well as for 2025, according to a survey.

Strong demand from the Mediterranean countries, including Spain, Portugal, and Greece, is trying to help the 20 Eurozone countries avoid falling into recession. But Germany, the region's largest economy, is still lagging behind, and German output is likely to fall for a second year in a row due to weak demand in major export markets. Geopolitical tensions are likely to make matters worse.

Meanwhile, the inflation rate fell sharply, falling to 1.7% in September. Officials stressed that their battle to control prices has yet to be won, citing that one of the pressure indicators for the service sector remains around 4%. But market bets on monetary easing have been increasing.

Economists surveyed also agree with the currency market's view that interest rates are likely to continue to be cut at every ECB meeting until March next year. After that, the pace of easing is likely to slow down, and deposit interest rates will drop to 2% by the end of 2025.

This would put it at the lower end of so-called neutral interest rate expectations that neither stimulate nor restrict economic activity. Analysts expect interest rates may soon reach the 2%-2.5% range.

Sören Radde, head of European Economic Research at Point72, stated before the interest rate decision was announced that “interest rates will be directly neutral.” In recent weeks, the risks surrounding the ECB's outlook have changed, “from the risk of continuing excessive inflation to the risk that inflation may be too low now.”