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The European Central Bank has warned of “headwinds” to the Eurozone’s stagnating economy as it cut its benchmark interest rate by a quarter-point to 2.75 per cent.
Thursday’s unanimous decision, which takes the ECB’s deposit rate to its lowest level since early 2023, came hours after Eurostat reported that the Eurozone economy had not grown at all in the fourth quarter of 2024.
ECB president Christine Lagarde cautioned that the economy was “set to remain weak in the near term”, adding that surveys pointed to a continued contraction in manufacturing even as services grow. “Consumer confidence is fragile,” she said.
She argued that economic risks were “tilted to the downside”, since greater frictions to global trade could weigh on the Eurozone economy while lower confidence might be a drag on investment and consumption.
In a statement accompanying the decision, the ECB maintained that the fall in inflation, which has tumbled from a 2022 peak of 10.6 per cent to 2.4 per cent in December, was “well on track”, while noting that “the economy is still facing headwinds”.
The central bank added that “monetary policy remains restrictive” — an acknowledgment that interest rates are still higher than the neutral rate that neither stimulates nor holds back the economy.
The euro strengthened following the widely expected cut, up 0.3 per cent on the day at $1.045.
The ECB has now cut rates five times since last summer and in trading immediately after the decision, swaps markets were pricing in two or three more quarter-point reductions by the end of the year, unchanged from earlier in the day.
“Our view is that economic data will continue to push the ECB to cut at every meeting until the deposit rate reaches 1.5 per cent,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price.
He cited the threat to Eurozone economic growth posed by US President Donald Trump’s tariff plans and the expected fall in inflation later in the year.
The central bank predicts only a slight acceleration in growth from 0.7 per cent for last year as a whole to 1.1 per cent this year.
On Thursday the ECB reiterated that “the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time”, pointing to increases in real incomes and lower borrowing costs.
By contrast with the Eurozone’s sluggish progress, the US economy expanded at an annualised rate of 2.8 per cent in the third quarter of last year.
The ECB’s decision also came a day after the US Federal Reserve kept rates on hold.
Investor expectations that it will cut rates more than the Fed this year have weakened the euro, which has come close to parity to the dollar.
“Currently the question is not if the ECB will continue to lower interest rates this year, but by how much,” wrote Ulrich Kater, chief economist at DekaBank, in a note to clients.
In a shift from previous hawkish language, in December the ECB dropped a commitment to “keep policy rates sufficiently restrictive for as long as necessary” to bring down inflation in line with its 2 per cent target.
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