The European Central Bank (ECB) has cut borrowing costs for the third time this year, lowering its benchmark interest rate from 3.5% to 3.25%.

The ECB has three key interest rates. The rates on the deposit facility were lowered to 3.25%, those on the main financing operations were lowered to 3.40% and those on the marginal lending facility were lowered to 3.65%. All were lowered by 25 basis points.

The decision to cut rates by a quarter point came after official data published Thursday showed year-on-year inflation in the eurozone had slowed to 1.7% in September.  

It marked the first time in more than three years that the inflation rate in the single currency area had fallen below the ECB's target of 2%.

What has caused inflation to cool?

The slowdown of the September inflation rate was due to changing energy costs, which fell by 6.1% compared to the same month last year.

"Victory against inflation is in sight," French central bank governor and ECB rate-setter Francois Villeroy de Galhau said last week.

"A cut is very likely," he said ahead of Thursday's ECB meeting, adding that "it will not be the last."

Consumer prices soared in the wake of the coronavirus pandemic and Russia's invasion of Ukraine, with inflation peaking at 10.6% in October 2022. That prompted the ECB to aggressively raise rates. But the bank's policymakers have already cut rates twice this year in response to the easing situation. 

The Frankfurt-based ECB's focus is now shifting to dealing with weak economic growth in the 20-country eurozone.

According to the institution's own forecasts published last month, growth is expected to slow to 0.2% in the third quarter and 0.8% in the whole of 2024. 

Editor's note: This story was updated on October 18, 2024, to reflect the ECB's three key interest rates

nm/wmr (Reuters, AFP)