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European Central Bank cuts interest rates after eurozone growth stalls European Central Bank cuts interest rates after eurozone growth stalls
(about 3 hours later)
Reduction by quarter of a point to 2.75% aims to stimulate economy, which stagnated in last quarter of 2024Reduction by quarter of a point to 2.75% aims to stimulate economy, which stagnated in last quarter of 2024
The European Central Bank has cut interest rates to ease the cost of borrowing across the 20-member eurozone as growth stagnates in the region.The European Central Bank has cut interest rates to ease the cost of borrowing across the 20-member eurozone as growth stagnates in the region.
The central bank cut rates by a quarter of a point to 2.75%, in line with expectations, after a run of bad news showing the bloc’s largest nations – France and Germany – suffering a dramatic slowdown in economic growth. The central bank cut rates by a quarter of a point to 2.75%, in line with expectations, after a run of bad news showing the bloc’s largest nations – France and Germany – suffering a slowdown in economic growth.
The central bank said that inflation remained high in many economies, “mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay”. The ECB’s president, Christine Lagarde, said its five cuts in interest rates since June last year from a peak of 4% were in line with the central bank hitting its target for inflation of near 2% over the medium term.
The latest official data showed the eurozone economy failed to grow in the final three months of 2024. However, the release added that wages growth across the single currency area was moderating, and many companies were absorbing extra costs rather than passing them on to consumers. However, she warned that “headwinds” meant the economy was “set to remain weak in the near term”, adding that “consumer confidence is fragile”.
Financial markets anticipate further cuts, with another one percentage point of reductions priced in for the rest of this year. Inflation remained high in many economies across the eurozone, the central bank said, “mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay”.
A survey of businesses across the eurozone found most economies experienced a weak end to 2024. A flash estimate found the euro bloc barely expanded in the last quarter of 2024, held back by a 0.2% decline in Germany. France’s economy shrank by 0.1% in the quarter, while Italy’s economy recorded zero growth. While the adjustment was taking longer than previously estimated, inflation was easing in line with the ECB’s expectations.
Carsten Brzeski, the global head of macro at ING, said growth in the euro area economy was “sluggish” and the interest rate cut was justified. Thursday’s cut followed a vote the previous day by the Federal Reserve to hold US interest rates at the current 4.25%-4.5% range in response to figures showing the US economy performing strongly, sparking fears of rising prices.
However, he said the ECB would need to go further to reverse a poor run of economic data. “At 2.75%, the deposit interest rate is still restrictive – too restrictive for the eurozone economy’s current weak state,” he said. The latest official eurozone data showed the bloc’s economy failed to grow in the final three months of last year. An estimate found growth barely expanded in the last quarter of 2024, held back by a 0.2% decline in Germany. France’s economy shrank by 0.1% in the quarter, while Italy’s economy recorded zero growth.
Brzeski added that recent increases in global interest rates, which have increased the borrowing costs of eurozone governments, would weigh on public spending and restrict growth. Financial markets anticipate further cuts by the ECB, with another one percentage point of reductions priced in for the rest of this year.
Lagarde said global economic risks “remain tilted to the downside”, warning that heightened geopolitical tensions could increase inflation if they pushed up supply chain costs.
In what appeared to be a reference to Donald Trump’s threat to put tariffs on all imports into the US, she said: “Greater friction in global trade would make the inflation outlook in the euro area more uncertain.”
Lagarde added that lower interest rates had sparked the European mortgage market back into life, but business lending remained low and consumer spending was subdued, despite sustained inflation-busting pay rises, she said.
The ECB said in its report on Thursday that uncertainty about the outlook for the eurozone and volatile global markets were persuading both businesses and consumers to keep their wallets closed. Meanwhile wages growth across the single currency area was moderating, and many companies were absorbing extra costs rather than passing them on to consumers, bringing inflation down.
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Carsten Brzeski, the global head of macro at ING, said growth in the euro area economy was “sluggish” and the interest rate cut was justified.
He said the ECB would need to go further to reverse a poor run of economic data. “At 2.75%, the deposit interest rate is still restrictive – too restrictive for the eurozone economy’s current weak state,” he said.
Brzeski added that recent increases in global interest rates, which have increased the borrowing costs of eurozone governments, would weigh on public spending and restrict growth.
“Even if some argue that monetary policy can do very little to solve structural issues, political instability and uncertainty in many countries will force the ECB to continue doing the heavy lifting.”“Even if some argue that monetary policy can do very little to solve structural issues, political instability and uncertainty in many countries will force the ECB to continue doing the heavy lifting.”
Deutsche Bank’s chief European economist, Mark Wall, said the ECB was underestimating the weakness of the eurozone economy and the need to reduce borrowing costs quickly to boost spending.
“There is really no reason to think the ECB won’t continue to cut rates, at least to a neutral level [of 2% to 2.5%], and we think quite probably below neutral by year-end,” he said.