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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 move, 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.
“The economy is still facing headwinds,” the ECB said, while repeating its analysis 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”.
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 slightly strengthened following the widely expected cut, flat on the day against the dollar at $1.042.
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 cuts 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,” Ulrich Kater, chief economist of Deka Bank, wrote 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.
