A third successive interest rate cut has been ordered by the European Central Bank (ECB) to help arrest a slowdown across the euro area.
The Bank’s governing council said that while its battle against inflation continued to show real progress, it was also acting to help stoke weakening demand in the 20 nations that use the single currency.
The quarter point cut in its main lending rate, to 3%, was the fourth this year.
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The governing council’s statement said: “Staff now expect a slower economic recovery than in the September projections.
“Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter.
“Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027.
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“The projected recovery rests mainly on rising real incomes – which should allow households to consume more – and firms increasing investment. Over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.”
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The pound, which reached an eight-year closing high versus the single currency on Wednesday, remained elevated in the wake of the governing council’s statement.
It gave no hint that the pace of interest rate cuts would be eased.
Sterling was trading at €1.2134 – up fractionally – in the wake of the update, which was very much in line with what economists and market participants had expected.
Much of the recent gains for the pound can be attributed to the fact that the ECB shows no sign of slowing its pace of rate reductions while the Bank of England is tipped to sit tight and continue to follow a more gradual path next year.
Domestic currencies tend to strengthen when interest rates are higher as they bolster investor returns in areas such as government bonds.
Michael Brown, strategist at Pepperstone, said in advance of the ECB decision: “Euro-sterling moving lower makes sense.
“The economic outlook in the UK looks pretty grim but I think the euro zone is the only place where it’s actually worse.
“You also have two big doses of political uncertainty on top of that in France and Germany,” he added.
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While Europe’s largest economy is heading for snap elections in February, the manufacturing powerhouse is enduring a drop in demand for orders from abroad and grappling stiff competition.
Another looming threat is the possibility of further damage arising from trade tariffs imposed by Donald Trump when he gets the keys to the White House for a second time next month.
Activity in France has also been hit following a political stalemate that has shaken confidence in the country’s ability to manage its finances.
It is yet to agree a budget for 2025.
As a result of the Franco-German led difficulties, analysts see the ECB cutting rates at every meeting in the
first half of next year.
