ECB cuts interest rates again as Lagarde warns economic recovery faces 'headwinds'

The European Central Bank (ECB) has cut interest rates for the second time this year, bringing its main rate down to 3.5% from 3.75%, as well as lowering its economic growth forecasts for the eurozone.

Markets had widely anticipated the 25 basis point cut, which comes after the bank lowered rates in June for the first time in five years.

ECB president Christine Lagarde said: "According to survey indicators, the recovery is continuing to face some headwinds. We expect the recovery to strengthen over time, as rising real incomes allow households to consume more.

"Risks to economic growth remain tilted to the downside. Lower demand for euro-area exports owing, for instance, to a weaker world economy or an escalation in trade tensions between major economies, would weigh on euro-area growth."

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The ECB projected eurozone economic growth of 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026.

"This is a slight downward revision compared with the June projections, mainly owing to a weaker contribution from domestic demand over the next few quarters," Lagarde said.

Meanwhile,headline inflation was forecast to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections.

Recent data has shown both slightly slower economic growth in the eurozone but also cooling inflation.

Eurozone economic growth was revised down to 0.2%, from 0.3% initially forecast for the second quarter, in data released by statistics body Eurostat on Friday.

The data followed industrial production figures on Friday from Germany, Europe’s largest economy, which showed output fell by 2.4% in July from the previous month, putting pressure on the ECB to set its policy to support growth.

Eurozone inflation dropped to 2.2% in August, its lowest level July 2021, closing in on the ECB's 2% target, and fuelling expectations of another rate cut.

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Lindsay James, investment strategist at Quilter Investors, said: “Given it is faced with an economy in desperate need of some form of stimulus, the ECB will be hoping this second quarter point rate cut will begin to make easier financial conditions felt.

"Today’s news is sure to provide some relief to consumers and businesses which could help the continent on its way towards an improved economic recovery, but whether the ECB can cut rates again this year remains to be seen."

Both the Federal Reserve and Bank of England (BoE) are due to announce their own interest rate decisions next week.

The Fed is expected to announce a 25 basis-point cut on Wednesday, having held them in the 5.25% to 5.5% range since July 2023.

Markets anticipated that the BoE will decide to keep rates on hold next Thursday, having cut them to 5% in August, though two more base rate reductions are expected this year.

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