An IMGW News Report
The European Central Bank (ECB) has reduced its interest rates for the third consecutive meeting, signalling further cuts in 2025 as inflation approaches its target and the economy faces ongoing difficulties.
In line with analyst expectations, the ECB lowered the deposit rate by a quarter-point to 3%, marking a total reduction of 100 basis points since June. The bank also adjusted its language, dropping previous references to maintaining a “sufficiently restrictive” policy stance.
“The Governing Council is determined to ensure that inflation stabilizes sustainably at its 2% medium-term target,” the ECB stated. “It will adopt a data-dependent, meeting-by-meeting approach to determining the appropriate monetary-policy stance.”
Following the announcement, the euro dropped 0.2% to $1.0470, with traders focusing on the removal of the reference to “restrictive” rates. Investors are now anticipating an additional 125 basis points of easing next year, in line with expectations before the ECB’s decision.
Despite the absence of a firm commitment, consecutive interest rate cuts are widely expected to continue through mid-2025, as Europe’s sluggish economy faces political instability in Germany and France, along with potential disruptions to global trade linked to Donald Trump’s potential return to the US presidency.
Concerns have emerged that weak growth could drag inflation — currently at 2.3% — below the target, recalling the pre-Covid era when the emphasis was on boosting prices rather than controlling them.
The ECB’s revised quarterly projections, published on Thursday, reflect the uncertain outlook, downgrading expectations for both economic growth and inflation in 2025. President Christine Lagarde pointed to risks for the economy, citing waning momentum in the 20-nation eurozone.
“The economy should strengthen over time, although more slowly than previously expected,” Lagarde commented during a press conference in Frankfurt. “The risk of greater friction in global trade could weigh on euro-area growth by dampening exports and weakening the global economy.”
The ECB’s decision to cut rates was unanimous, though some officials proposed a larger 50 basis-point cut. Lagarde noted, “There were some discussions with some proposals to consider possibly 50 basis points. But the overall agreement was that 25 basis points was the right decision.”
Despite a surprise acceleration in growth in the third quarter, recent data suggest a slowdown, particularly in the services sector, which had been compensating for long-standing weakness in manufacturing. This has sparked debate over the extent to which the ECB should continue to lower borrowing costs, and whether such easing will effectively address structural challenges in the region, such as labour shortages and higher energy prices.
Economists expect the ECB to gradually move towards a neutral policy stance in 2025, with a slower pace of cuts following the first quarter. However, as inflation continues to decelerate and economic risks persist, some analysts predict the central bank may need to lower rates further to reach its 2% inflation target.
While some ECB officials, including Italy’s Fabio Panetta and France’s François Villeroy de Galhau, have not ruled out entering expansionary territory, others, such as Isabel Schnabel and Bundesbank President Joachim Nagel, have cautioned against aggressive rate cuts. Lagarde noted that the debate on the neutral rate will continue as the ECB approaches its target, but she emphasised that it remains premature to make definitive decisions on this issue.
As the ECB moves forward, the path it takes will largely depend on economic data, with the next several months likely to be crucial in determining the future trajectory of European monetary policy.
