|
Getting your Trinity Audio player ready...
|
On Thursday, the European Central Bank (ECB) announced its fourth interest rate cut of the year, aligning with expectations of a 0.25% reduction. This adjustment brings the deposit facility rate — the ECB’s primary policy rate — down to 3%, marking a continuation of the easing cycle that began in June 2024. Previously, the rate had remained at 4% since September 2023.
“The disinflation process is well on track,” the ECB stated in its accompanying release, signaling progress toward stabilizing inflation. The bank also omitted its prior pledge to maintain “sufficiently restrictive” policy rates, a shift interpreted by analysts as a more dovish stance.
In its latest macroeconomic projections, the ECB revised its inflation forecast for 2024 slightly downward to 2.4% from 2.5%, and for 2025 to 2.1% from 2.2%. However, economic growth projections were also trimmed, with the eurozone now expected to grow by 0.7% in 2024 (down from 0.8%) and by 1.1% in 2025 (down from 1.3%).
ECB President Christine Lagarde highlighted ongoing risks to economic growth, which remain “tilted to the downside.” She pointed to potential challenges in global trade and weaker consumer and business confidence as key concerns. The uncertainty has been exacerbated by proposed trade tariffs from U.S. President-elect Donald Trump, which have clouded the 2025 economic outlook.
Discussion of a Larger Rate Cut
While the Governing Council ultimately settled on a 25-basis-point cut, a 50-basis-point reduction was also considered during deliberations. Lagarde revealed that some members had advocated for the larger cut, but the consensus deemed 25 basis points more appropriate given the economic landscape.
Key factors influencing the decision included a consistent convergence of inflation toward the 2% target across six consecutive projections, declining wage pressures, and persistent service sector inflation.
Lagarde cautioned that while inflation has moderated, the fight is not yet over. “We still have service inflation that is running high… we would really want to see a change in the composition of inflation to feel totally confident that we are really almost at target,” she remarked in an interview with CNBC.
Money markets had largely anticipated the 25-basis-point move, given the ongoing challenges in major manufacturing economies like Germany and concerns over wage growth and service sector inflation.
The ECB’s decision reflects a delicate balancing act as it navigates moderating inflation, slower economic growth, and persistent risks to the eurozone economy.
