ECB cuts rates as expected, signals readiness for further easing
The European Central Bank reduced interest rates by a widely expected 25 basis points to 2.75%, keeping the door open for further easing as sluggish economic growth takes priority over persistent inflation worries.
This marks the ECB’s fifth rate cut since June, with financial markets anticipating two or three more reductions this year. Policymakers argue that the worst inflation surge in decades is nearly under control, while the struggling economy requires additional support.
The ECB reaffirmed that disinflation remains on track and welcomed a slowdown in wage growth, which is expected to help ease inflationary pressures in the domestically driven sectors of the economy.
With the euro zone economy stagnating in the final quarter of 2024 due to an industrial downturn and weak consumer spending, the ECB appears committed to its easing path, even as the U.S. Federal Reserve opted to keep interest rates unchanged, signaling a prolonged pause.
ECB officials likely found some relief in the fact that U.S. President Donald Trump’s new administration refrained from imposing broad trade tariffs as initially feared. However, lingering trade threats continue to cast uncertainty over the economic outlook.
Economic data from the Euro zone’s largest economies painted a bleak picture. Germany and France both saw contractions in the final quarter, while Italy’s economy stagnated. Spain was the only one among the bloc’s four largest economies to record positive growth.
Inflation, which reached 2.4% in December, is expected to take a few more months to ease back to the ECB’s 2% target. However, policymakers see little reason to doubt that inflation is moving in the right direction.
Wage growth is moderating, the labor market is softening, oil prices have retreated from early-year highs, and the U.S. dollar’s recent strengthening appears to have paused.
While some voices within the ECB remain concerned that service sector costs are still too high, this is seen more as an argument for gradual rate reductions rather than a pause in easing.
However, as discussions begin over where the ECB’s rate-cutting cycle should end, maintaining consensus among policymakers may become increasingly challenging with each future cut.