European Central Bank cuts key interest rates as inflation falls

Sept. 12 (UPI) -- The European Central Bank Thursday cut key interest rates, citing inflation dynamics as it loosened monetary policy restrictions.

The cut brought deposit interest rates to 3.5% -- a 25 basis point cut -- while refinance rates fell to 3.65% and loan rates dropped to 3.9%. The cuts will be effective Sept. 18.

"We expect the recovery to strengthen over time, as rising real incomes allow households to consume more. The gradually fading effects of restrictive monetary policy should support consumption and investment. Exports should also continue contributing to the recovery as global demand rises." ECB President Christine Lagarde , and Vice President Luis de Guindos said in a press conference Thursday.

They said Europe's labor market remains resilient and the unemployment rate was broadly unchanged in July, at 6.4%.

"Recent inflation data have come in broadly as expected, and the latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections," the ECB said in a statement.

The bank said European inflation is expected to rise again later in 2024 due to previous falls in energy prices dropping out of the rates. The ECB expects it to drop again toward the bank's target of 2% over the second half of 2025.

Despite the interest rate cut the ECB said domestic inflation remains high with wages rising at an elevated pace. Overall financing conditions remain restrictive, the ECB statement said, and economic activity is still subdued.

The ECB said that reflects weak private consumption and investment.

In June the ECB also cut interest rates by a quarter point after nine months of holding rates steady, citing falling inflation.

In July the bank decided to hold rates steady.

"The disinflation process should be supported by receding labor cost pressures and the past monetary policy tightening gradually feeding through to consumer prices," Lagarde, and de Guindos said in a press conference statement. "Most measures of longer-term inflation expectations stand at around 2%, and the market-based measures have fallen closer to that level since our July meeting."

They said they're determined to return inflation "to our 2% medium-term target in a timely manner. We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim."

Editors note: A previous version of this story stated that all three interest rates were cut by a 25 basis points, it has been updated to reflect that only the deposit interest rate was lowered by that amount.