The European Central Bank (ECB) has announced a 0.25 percentage point cut to its key interest rate, bringing it down to 2.75%, as economic growth in the eurozone remains sluggish. The decision, in line with market expectations, follows a series of five rate reductions since June 2024, when rates peaked at 4%.
ECB President Christine Lagarde acknowledged that while inflation was gradually aligning with the central bank’s 2% target, economic headwinds persisted. “Consumer confidence is fragile, and the economy is set to remain weak in the near term,” she cautioned.
The latest eurozone data revealed that economic growth stalled in the final quarter of 2024. Germany, the bloc’s largest economy, contracted by 0.2%, while France shrank by 0.1%. Italy’s economy remained flat, and overall eurozone growth failed to gain momentum.
Despite easing inflation, the ECB noted that wages and prices in certain sectors were still adjusting to past inflationary pressures. While higher wages have helped some households, business lending remains low, and consumer spending has yet to recover significantly.
The rate cut comes a day after the US Federal Reserve opted to hold its interest rates steady at 4.25%-4.5%, citing strong economic performance and concerns over inflationary risks. The contrasting approaches reflect the diverging economic trajectories of the two regions, with the eurozone struggling to gain momentum while the US economy remains robust.
Financial markets anticipate that the ECB will continue cutting rates, with another one percentage point of reductions expected before the end of the year. Analysts believe that the current rate of 2.75% remains restrictive for an already fragile eurozone economy.
Carsten Brzeski, global head of macro at ING, described eurozone growth as “sluggish” and suggested that further rate reductions would be necessary. “At 2.75%, the deposit interest rate is still too high given the eurozone’s weak state,” he argued.
Mark Wall, chief European economist at Deutsche Bank, echoed this sentiment, suggesting that the ECB may need to push rates below 2% by year-end. “The ECB is underestimating the weakness of the eurozone economy and the need to cut rates quickly to boost spending,” he said.
Lagarde also warned that global economic risks remain tilted to the downside, pointing to geopolitical tensions that could disrupt supply chains and impact inflation. While she did not explicitly mention the US election, her comments appeared to reference Donald Trump’s threat to impose tariffs on all imports into the US, which could create additional economic uncertainty for the eurozone.
The ECB noted that lower interest rates had begun to revive the European mortgage market, though business investment and lending remain subdued. Despite inflation-busting wage increases in some sectors, consumer spending remains cautious as businesses absorb additional costs rather than passing them on to customers.
With eurozone governments facing higher borrowing costs due to global interest rate trends, concerns persist over the impact on public spending and long-term economic growth. Analysts believe that political instability across Europe may further complicate the ECB’s efforts to steer the region’s economy toward recovery.
As the ECB navigates a delicate balance between stimulating growth and managing inflation risks, all eyes are now on its next moves in monetary policy. With further cuts expected, policymakers will need to assess whether reducing rates will be enough to reignite economic momentum in the eurozone.
