For the second time in a row: the European Bank lowered interest rates in the Eurozone

The European Central Bank lowered the interest rate in the Eurozone by a quarter of a percentage point to 3.5%. This is the second interest rate cut in a row against the background of falling inflation in the bloc and an economic slowdown. Following the rise in inflation after the corona virus and Russia’s invasion of Ukraine, the central bank raised the interest rate in a series of decisions until the all-time high of 4% in September 2023. Since then, the interest rate has been kept at its level until last June.

Now, when it seems that the threat of inflation has been removed and the European economy is in difficulties, the bank is trying to restart the economy by lowering interest rates. In August, annual inflation was recorded at 2.2%. The bank expects the average annual inflation to reach 2.5% in 2024, and 2.2% in 2025. In terms of growth, the bank’s staff predicts that 2024 will amount to a creeping growth of 0.8%, which will rise to 1.3% in 2025.

The forecast is encouraging regarding price stability but gloomy regarding growth. It seems that even according to the bank’s own forecasts, the ability of the interest rate cut to restart the European economy is questionable.

Earlier this week, Mario Draghi, former President of the European Bank and Prime Minister of Italy, published a comprehensive report on the European economy in which he called for the expansion of annual investment in infrastructure in the continent by approximately 5% of GDP per year (approximately 750 billion euros according to 2023 figures). For this purpose, he Determines, extensive investment by the public sector will be required. Draghi proposed a joint debt issue of all the companies in the currency bloc.

The bloc’s rules are strict regarding government spending policies, and not surprisingly, the countries resorted to budget cuts after the corona virus, which increased the public debt. As a result, the European economy froze. The US economy, which under Biden adopted an expansionary investment policy, grew by more than 9% compared to the last quarter of 2019, while the German economy, the largest in the bloc, grew by less than 1%.