As expected, the European Central Bank cut the eurozone’s benchmark interest rate by 25 basis points to 4.25% today, its second reduction in borrowing costs of the year.

The decision was widely expected. “Today’s rate decision will not be seen as too much of a surprise as over the past couple of weeks, the case for an ECB rate cut had increased substantially,” says CIBC World Markets. “On the international front, the situation has deteriorated notably, with still not the slight hint of a U.S. recovery, while Japan is flirting with recession. Meanwhile, domestically, the case for a rate cut had also strengthened of recent: domestic demand is showing increased signs of a slowdown, inflation has softened and the recent appreciation of the euro implied an effective tightening in monetary conditions, which needed to be offset by an interest rate policy response.” While the cut may help some currency traders, the lack of surprise hasn’t had much effect on equity markets.

In a press conference following the rate announcement, Wim Duisenberg, president of the ECB, attributed the move primarily to weaker inflation signals. “There are clear signals of lower inflationary pressures from the demand side. Recent data on economic activity indicate that real GDP growth in 2001 will most likely be lower than was expected a few months ago.”

Traders were looking for some hint about if the ECB may cut again, and when. “In typical fashion, the ECB’s president gave little away with regards to the very near-term monetary policy outlook as the press conference was more a question of justifying this latest rate cut rather than giving some hints as to what to expect in the weeks to come,” comments CIBC.

“Anyway, Duisenberg sounded quite relaxed on the inflation outlook, which means that the ECB will have a greater margin for maneuvering would it need to ease monetary policy again. This can only reinforce our view that another 25 to 50 bp rate cut is on the agenda before year-end.”