The European Central Bank and the Federal Reserve may cut interest rates. Experts say the magnitude will be moderate

On September 12, 2024, news from Frankfurt, Germany. As inflation gradually subsides, the European Central Bank is expected to cut interest rates again on Thursday to lower borrowing costs for businesses and homebuyers, thereby supporting economic growth. At the same time, the U.S. Federal Reserve may also join the interest rate cut process soon.

However, experts point out that these two central banks will not quickly and significantly cut interest rates to levels close to the extremely low levels before the 2020 COVID-19 pandemic. The European Central Bank is expected to act cautiously and may only cut interest rates one more time this year. Inflation has declined with the help of falling oil prices, but policymakers still need to pay attention to potential inflation in service enterprises and rising wages, as workers are trying to make up for the lost purchasing power during post-pandemic inflation.

The European Central Bank paused in July after cutting interest rates in June and entered the summer break in August. The interest rate-setting committee led by President Christine Lagarde needs to balance concerns about growth prospects with ensuring that inflation reaches the central bank's 2% target. Currently, the inflation rate in the 20 countries using the euro fell to 2.2% in August, close to the European Central Bank's target. After the Russia-Ukraine conflict in 2022, factors such as disruptions in natural gas transportation led to a surge in consumer prices, and since then inflation has spread to the service sector.

The European Central Bank and the Federal Reserve previously responded to inflation by rapidly raising interest rates. The European Central Bank's benchmark interest rate once reached a record high of 4% and has now fallen to 3.75%. The central bank's benchmark interest rate affects the borrowing costs of private banks and interest rates throughout the economy. Although high interest rates can restrain inflation, they may also slow economic growth.

The Federal Reserve is also expected to cut its benchmark interest rate for the first time at its meeting on September 17-18. In August, consumer prices rose 2.5% year-on-year, and the core inflation rate was 3.2%. Brian Coulton, chief economist at Fitch Ratings, said that the Federal Reserve's easing cycle has arrived, but the pace of interest rate cuts will be moderate.

European economic growth is sluggish, only 0.3% in the second quarter of this year. The German economy contracted by 0.1% in the second quarter, and the outlook is bleak. Long-term factors such as an aging population and a shortage of skilled workers have also slowed down business development. Volkswagen has abandoned its no-layoff promise and warned that it may close factories in Germany.