ECB cuts rates by 0.25%, leaves room for more easing as growth lags
Jan 30, 2025
Synopsis
ECB rate cut: The European Central Bank cut interest rates by 0.25% due to concerns about economic growth. This marks the bank's fifth rate cut since June. The ECB aims to tackle inflation, disinflation is on track, and wage growth is slowing down. The bank remains open to future rate cuts despite global uncertainties and challenges.
The European Central Bank cut interest rates by a quarter percentage point on Thursday and kept the door open to further policy easing as concerns over lacklustre economic growth supersede worries about persistent inflation.
The ECB’s governing council lowered the benchmark rate by 0.25 percentage points to 2.75% at its Frankfurt headquarters, prioritizing economic growth as inflation nears the bank’s 2% target.
It was the fifth ECB rate cut since June and markets expect two or three more this year, driven by arguments that the biggest inflation surge in generations is nearly defeated and the flagging economy needs relief.
The ECB reaffirmed disinflation was "well on track" and welcomed slower growth in wages, which should help bring down inflation in the domestically focussed part of the economy.
"Wage growth is moderating as expected, and profits are partially buffering the impact on inflation," it said in a statement accompanying the decision.
With the euro zone economy stagnating in the last quarter due to an industrial recession and weak consumption, the ECB is seen sticking to its easing path even after the U.S. Federal Reserve kept rates unchanged and hinted at a lengthy pause.
ECB policymakers are likely to have breathed a sigh of relief at their meeting after U.S. President Donald Trump's new administration did not impose blanket trade tariffs as feared, although the threats he made have cast a shadow on the outlook.
ECB President Christine Lagarde is unlikely to commit explicitly to more cuts at her 1345 GMT press conference.
But she is expected to repeat her long-time guidance that the direction of policy is clear and that the risk of a trade war with the United States could sap weak growth even more.
The economies of Germany and France both contracted in the final quarter of 2024 and Italy stagnated, leaving Spain as the only country among the euro zone's big four with a positive growth rate.
"I think the ECB is quite comfortable with the market pricing and financial conditions as priced by markets, in the grand scheme," Danske Bank economist Piet Haines Christiansen said before the decision.
"The doves may have a preference for slightly easier conditions though, but I don't think it's a battle that they want to pick now, or actually be able to win," Christiansen added.
Inflation, which rose to 2.4% in December, could still take a few months to ease back to the ECB's 2% goal but there is little to challenge the narrative that all is on track.
Wage growth is easing, the labour market is softening, oil prices have come off early-year highs and the dollar's relentless firming seems to have stopped for now.
A few voices are still likely to argue that pressure on services costs remains too high for comfort but that is more an argument for gradualism than for a pause.
COMPLICATIONS
But with a debate already starting on where the ECB's rate cuts should end, consensus may be more difficult to maintain with each future cut.
Trump's policies could make the environment more volatile. His threatened trade tariffs could weigh on growth and any retaliatory measures by the European Union would risk pushing up inflation.
Trump last week demanded that the Fed cut interest rates but the bank resisted on Wednesday, arguing that inflation was still elevated and it was not in a hurry to cut borrowing costs, a signal taken by markets to suggest a longer pause may be ahead.
Any escalation of the war of words between them might rattle financial markets.
At 2.75%, the ECB's deposit rate is approaching the 1.75% to 2.50% range considered "neutral", neither fuelling nor dampening economic activity. But any Trump-induced volatility could intensify calls for the ECB to go below this rate and start stimulating growth.
"Markets are pricing a terminal rate of around 2%, which remains broadly consistent with our estimates for a neutral policy rate for the euro area, Konstantin Veit at PIMCO said.
"Nevertheless, we see additional downside risks to euro area growth post US election and potential for lower terminal rates."
A trade war would shake already weak confidence.
Consumers are saving up cash, industry is shrinking, governments have modest buffers to spend and exports - long the driving force behind growth - are barely expanding.
But inflation is still above the ECB's target and poor productivity growth along with labour shortages could keep up price pressures, likely limiting just how far the bank can go.
Foreshadowing the upcoming debate on pausing, board member Isabel Schnabel, an outspoken policy hawk, said the ECB was getting closer to the point where it must debate how much more it can cut.
[The Economic Times]
