Indicating that more easing is anticipated in the months ahead, the European Central Bank lowered interest rates by a quarter of a percentage point on Thursday, stating that it anticipates inflation to return to its target later in the year.
The ECB lowered its deposit rate to 2.75% from 3%, the lowest level in almost two years. Following the Federal Reserve’s Wednesday rate-stability announcement and indication that it was not in a rush to make any more cuts, the ECB made its fifth cut in its previous six meetings.
According to the ECB, the eurozone’s disinflation process is proceeding according to plan and is expected to reach its medium-term target of 2% this year.
“The main reason domestic inflation is still high is that prices and salaries in some industries are still taking a long time to react to the previous spike in inflation. However, as anticipated, wage growth is slowing, and profits are lessening the impact on inflation, the central bank stated.
The European Central Bank stated that monetary policy “remains restrictive” and that financing conditions are still tight due to previous interest-rate hikes.
Economists said that paves the way for additional rate reductions.
“It’s very obvious that policymakers anticipate more interest-rate reduction at upcoming meetings given that they no longer appear to believe that interest rates need to remain restrictive. (It also raises the question of why they haven’t lowered interest rates sooner.)” wrote Jack Allen-Reynolds, Capital Economics’ deputy chief eurozone economist.
The eurozone economy is expected to increase by just 1.1% this year, according to the ECB’s staff last month. This is an improvement over last year, but it’s still a modest growth rate. While periphery countries like Spain and Greece have profited from an increase in tourism, the core economies of the eurozone—Germany and France—have been plagued by stagnation and unrest, as well as the effects of slowing Chinese trade.
Indicator Latest Peak Trough Inflation, year over year 2.40% 10.60% 1.70% GDP, quarter on quarter 0.40% 0.90% -0.10% Unemployment 6.30% 6.90% 6.30% House prices, year over year 2.60% 9.80% -2.30% Source: European Statistical Monitor/Eurostat
Even though the most recent inflation figure was 2.4%—above the ECB’s target—it is still anticipated to decline to 2.1% this year. Since September, core inflation has remained at 2.7%.
Christine Lagarde, the president of the European Central Bank, stated at a press conference that the decision to reduce was made unanimously and that no Governing Council members had called for a bigger cut of 50 basis points.
Lagarde stated that it would be “premature” for policymakers to contemplate “the point where we have to stop,” but she did not provide any details regarding when the ECB will take its next action. The direction of travel is known to us.
ECB will “follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance” and is not bound by a certain rate path, according to the ECB statement.
Regarding how U.S. President Donald Trump’s tariff threats would affect its policy stance, Lagarde provided no direction.
“There is nothing that we can actually capture in terms of policy determination, in terms of numbers, in terms of scope, in terms of custom line items, to understand what exactly is considered” to be subject to tariffs, Lagarde stated.
Once that is established, “it will enter into our assessment and policy determination and into the macroeconomic analysis that is produced by our staff,” she stated, adding that “it’s far more complicated than it’s this way or that way, it’s inflationary or deflationary, depending on whether there is one set of decisions with variable rates around the world, rerouting of trade [and] whether there is retaliation or not.”
“All we know for sure is that it will have a global negative impact,” Lagarde stated.
In fact, European stocks have performed better this year than U.S. stocks; the Vanguard FTSE Europe ETF’s 6% VGK return doubled the S&P 500 SPX’s gain. Since late September, the euro (EURUSD) has lost 7% of its strength.
