European Central Bank to continue interest rate cuts
A sign of the European Central Bank (ECB) stands in front of the bank's headquarters in Frankfurt am Main, western Germany, on January 25, 2024. (AFP Photo)
European Central Bank’s chair Christine Lagarde said eurozone policymakers would keep cutting interest rates if forthcoming inflation data aligns with anticipations.
“Even though we are not there yet, we are close to achieving our target” of 2% inflation, Lagarde said in a speech at the Bank of Lithuania on Monday. “If the incoming data continues to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” she said.
The ECB cut rates again last week as inflation looked to be coming under control and the eurozone economy showed signs of weakness. The quarter-point move was the Frankfurt-based central bank’s third cut in a row and its fourth since June. The easing cycle has brought the ECB’s key deposit rate down to three percent from an all-time high of four percent.
The central bank’s stance remained “restrictive,” Lagarde said, meaning it would act as a brake on business activity in the eurozone — the ECB’s main lever for tamping inflation. But “with the disinflation process well on track, and downside risks to growth,” the ECB could loosen its monetary policy and soften its messaging, Lagarde said.
Inflation in the eurozone stood at 2.3% in November, having hit highs of over 10% in late 2022. In new economic projections published last week, the ECB said it expected the inflation rate to decline to 2.1% in 2025 and 1.9% in 2026.
Warning to Trump: Pledged tariffs threaten Eurozone
There was now a greater risk that inflation would fall even further due to a “weaker-than-expected growth outlook” and “geopolitical events,” Lagarde said. If the United States took a protectionist run on trade under Trump, “growth in the euro area is likely to take a hit,” she said.
On the campaign trail, Trump pledged blanket tariffs of at least 10% on all imports when he returns to the Oval Office. Even if the European market was not targeted directly, eurozone manufacturers were “particularly sensitive to shifts in confidence about world trade,” Lagarde said. At the same time, “a rise in geopolitical tensions could push energy prices and freight costs higher in the near term.”
The ECB’s governing council will hold its first rate-setting meeting of 2025 on Jan. 30, 10 days after Trump’s inauguration.
