The European Central Bank (ECB) announced a reduction in interest rates to 2.75 percent, with policymakers indicating that another cut may follow in March. This decision comes as worries about sluggish economic growth overshadow concerns about ongoing inflation. This marks the fifth rate cut by the ECB since June, and the market anticipates two or three additional reductions this year. The rationale behind this expectation is the belief that the significant inflation surge experienced in recent generations is nearly under control, and the ailing economy requires support.
“We know the direction of travel,” ECB President Christine Lagarde stated at a press conference following the announcement. “At which pace, with what sequence, what magnitude, will be informed by the data that we will collect in the coming weeks and months and by the analysis that our staff will conduct.”
ECB interest rate cut amid stagnating eurozone economy
With the eurozone economy stagnating during the last quarter, attributed to an industrial recession and weak consumption, the ECB is expected to maintain its easing trajectory. This comes even as the U.S. Federal Reserve opted to keep rates unchanged, hinting at a prolonged pause in adjustments. ECB policymakers are likely to feel relieved that the new U.S. administration under President Donald Trump did not implement the broad trade tariffs that were anticipated. However, his threats to impose such tariffs have cast a cloud over the economic outlook.
Lagarde remarked that tariffs would have a “global negative impact” on growth, but their potential influence on inflation is “far more complicated” due to possible retaliatory actions and market adjustments.
A reduction in March would bring the ECB’s deposit rate down to 2.5 percent, which is at the upper end of the so-called neutral range—an area that neither stimulates nor suppresses economic activity, as estimated by ECB staff.
Read more: GDP remains steady in Eurozone, up by 0.1 percent in EU
Mixed signals from eurozone labor market and inflation
On one hand, wage growth across the 20 nations sharing the euro is slowing, the labor market is weakening, oil prices have retreated from their early-year peaks, and the dollar’s consistent strengthening appears to have halted for now. Conversely, inflation remains above the ECB’s target, and sluggish productivity growth combined with labor shortages may sustain price pressures, thereby limiting the extent to which the bank can maneuver. In preparation for this ongoing discussion, Lagarde announced that ECB staff would release a new estimate of the neutral rate on February 7. Last week, she adjusted her own range down to 1.75 percent to 2.25 percent.
Stock markets react positively to ECB interest rate cut
U.S. and European stock markets experienced gains on Thursday following the ECB’s interest rate cut and the release of strong corporate earnings reports. European markets advanced across the board, and the euro remained stable after the ECB’s fifth interest rate reduction since June, driven by easing inflation and a stagnating eurozone economy.
In New York, the broader S&P 500 index and the technology-heavy Nasdaq saw increases, while the Dow Jones remained relatively unchanged. The ECB’s decision came on the heels of the Federal Reserve’s choice to maintain U.S. borrowing costs, as the inflation outlook, despite some reduction, continues to remain elevated in the United States.
ECB interest rate cut in context of eurozone growth data
Data revealed that the eurozone economy was flat in the fourth quarter, with slight contractions in France and Germany, Italy remaining unchanged, and only Spain exhibiting robust growth among the largest economies in the bloc. In contrast, the U.S. economy expanded at an annual rate of 2.3 percent in the fourth quarter, as reported by the Commerce Department, aligning with the consensus forecast.
Fed and Trump’s response to ECB interest rate cut
The ECB reduced its rate by a quarter point to 2.75 percent, while the Federal Reserve maintained its benchmark lending rate between 4.25 percent and 4.50 percent. Although the ECB is poised to continue its rate cuts, Fed Chairman Jerome Powell indicated on Wednesday that the U.S. central bank is in no “hurry” to modify its borrowing costs again. U.S. President Donald Trump, who recently urged for rates to “drop immediately,” criticized policymakers for not addressing “the problem they created with inflation.” Powell refrained from commenting on Trump’s critique of the Fed but mentioned that decision-makers would “wait and see” how Trump’s proposed tariffs, tax cuts, regulatory changes, and immigration policies would impact the economy.
