European Central Bank cuts interest rates as inflation drops under 2%

The European Central Bank (ECB) on Thursday cut its key interest rate by 0.25 percentage points, as inflation in the eurozone fell to its lowest level since early 2021.

The deposit facility rate - the interest that banks receive for parking funds at the ECB - now stands at 3.25%.

The ECB's decision had been expected by economists, coming hours after the European statistics agency confirmed inflation fell sharply to 1.7% in September, down from 2.2% in August.

However, ECB President Christine Lagarde warned that interest rates would not necessarily be cut again immediately, after being lowered for the third time this year.

Speaking in Slovenia, she said "inflation is expected to rise in the coming months" and that the bank would "keep policy rates sufficiently restrictive for as long as necessary" to keep it around the target rate of 2%.

The latest cut is intended to help to revive struggling eurozone economies, including Germany's, which is expected to be in recession in 2024.

Cutting interest rates can stimulate growth by making it cheaper for individuals and businesses to borrow money.

But the bank remains wary of a return to high inflation, as experienced across the eurozone in the wake of the coronavirus pandemic and Russia's invasion of Ukraine.

Lagarde said the bank is "not pre-committing to a particular rate path" and will continue to base its decisions on its "assessment of the inflation outlook in light of the incoming economic and financial data."

As part of Thursday's decision, the bank also lowered its refinancing rate - the interest rate at which banks borrow money from the ECB - by 0.25 percentage points to 3.40%.