ECB cuts interest rates for fifth time after growth underwhelms
The European Central Bank (ECB) cut interest rates for the fifth consecutive meeting just hours after new figures showed the European economy unexpectedly stagnated at the end of last year.
The decision to cut rates by 25 basis points was widely expected by investors, and means the benchmark interest rate stands at 2.75 per cent.
Rates have been lowered from the record high of 4.0 per cent, which was reached in September 2023.
“The disinflation process is well on track,” the ECB said in a statement. “Most measures of underlying inflation suggest that inflation will settle around the target on a sustained basis.”
Policymakers admitted that inflation remained “high” as some sectors were still adjusting to the inflation surge. The latest figures showed that inflation in the euro area picked up to 2.4 per cent in December, up from a low of 1.7 per cent in September.
Services inflation, which is a better gauge of price pressures in the domestic economy, rose to 4.0 per cent in December, up from 3.9 per cent previously.
However, policymakers were confident that these pressures would ease. “Wage growth is moderating as expected, and profits are partially buffering the impact on inflation,” they said.
Many analysts interpreted the statement as a signal that there were further cuts to come. “This looks like a ‘dovish cut’,” Charles Seville, senior director in Fitch Rating’s economic team said.
Markets expect the ECB to cut rates gradually in 2025, with three further rate cuts priced in. But rate-setters could adopt a more aggressive policy if the economy continues to struggle.
The decision came just hours after new figures showed that the eurozone economy under-performed expectations in the final quarter of last year.
The bloc was stagnant in the final three months of the year, according to a ‘flash’ estimate from Eurostat, down from growth of 0.4 per cent in the third quarter.
Continued weakness in Germany and France – which both saw contractions – offset stronger growth in the periphery. Over the course of the year the euro area grew 0.7 per cent
“The eurozone economic recovery has again come to a standstill,” Bert Colijn, an economist at ING said.
The ECB noted the economy was still “facing headwinds”, but predicted a pick-up in demand on the back rising real incomes and lower interest rates.
The decision comes in the wake of the US Federal Reserve’s move to pause their own easing cycle.