Europe cuts interest rates again as economic recovery stalls

London
CNN
—

The European Central Bank (ECB) cut its key interest rate on Thursday, reducing borrowing costs for the second time in recent months as inflation eases and the European economy weakens.

This measure will increase the key interest rate in the 20 euro countries from 3.75% to 3.5%.

In June, the ECB cut interest rates for the first time in five years, but left them unchanged at its last meeting in July. Inflation has continued to fall since then, falling to 2.2 percent in August, the lowest level in three years and close to the central bank's target of 2 percent. Wage growth, closely watched by ECB officials, also slowed in the second quarter.

At the same time, fears are resurfacing about the eurozone economy. The region narrowly avoided recession last year and, although growth has now returned, it slowed in the last quarter (April-June). Worryingly, output in the eurozone's largest economy, Germany, fell unexpectedly during this period.

However, the upturn in activity in Europe's services sector last month, boosted by the Olympic and Paralympic Games in Paris, may prove short-lived.

A recent survey of manufacturing and service sector companies “highlighted economic fragility across the euro area as new orders, employment and business confidence deteriorated,” according to S&P Global and Hamburg Commercial Bank.

“Overall, the second half of the year is likely to be characterized by sluggish growth,” Bert Colijn, chief economist at ING, wrote in a recent statement.

Earlier this week, former ECB chief Mario Draghi said in a report that the slowdown in economic growth and productivity posed an “existential challenge” for Europe.

He also warned that the region is lagging behind the United States and China in innovation, especially in high technologies. To make the European Union economy more competitive, investment in the EU would need to increase by about 750-800 billion euros ($826-882 billion) a year, he said.

“To achieve this increase, the EU's investment share of GDP would have to rise from around 22 percent today to around 27 percent, reversing a decades-long decline in most major EU economies,” Draghi wrote.

This is a developing story and will be updated.