FRANKFURT (Jan 30): The European Central Bank (ECB) cut interest rates on Thursday and kept the door open to further policy easing, as concerns over lacklustre economic growth supersede worries about persistent inflation.
It was the fifth ECB rate cut since June, and markets expect two or three more this year, driven by arguments that the biggest inflation surge in generations is nearly defeated and the flagging economy needs relief.
"We are confident that inflation will reach our target in the course of (2025) ... sustainably so," ECB president Christine Lagarde told a press conference. The central bank targets euro zone inflation at 2%.
She said the decision, which was expected and left the euro and bonds unchanged, was backed unanimously by policymakers.
With US President Donald Trump continuing to wield the threat of tariffs, Lagarde acknowledged that greater trade frictions could both upset the inflation outlook and weigh on the 20-country euro zone's already lacklustre economy.
"The risks to economic growth remain tilted to the downside. Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy," Lagarde said.
Euro zone growth stagnated in the last quarter due to an industrial recession and weak consumption. That means the ECB is seen sticking to its easing path, even after the US Federal Reserve kept rates unchanged on Wednesday and hinted at a lengthy pause in its own easing cycle.
ECB policymakers are likely to have breathed a sigh of relief at their meeting after Trump's administration did not impose blanket trade tariffs as feared, although the threats he made have cast a shadow on the outlook.
European consumers are saving up cash, industry is shrinking, governments have modest buffers to spend, and exports — long the driving force behind growth — are barely expanding.
The economies of Germany and France both contracted in the final quarter of 2024, and Italy stagnated, leaving Spain as the only country among the euro zone's big four with a positive growth rate.
"I think the ECB is quite comfortable with the market pricing and financial conditions as priced by markets, in the grand scheme," Danske Bank economist Piet Haines Christiansen said before the decision.
Inflation, which rose to 2.4% in December, could still take a few months to ease back to the ECB's 2% goal, but there is little to challenge the narrative that all is on track.
Wage growth is easing, the labour market is softening, oil prices have come off early-year highs, and the dollar's relentless firming seems to have stopped for now.
A few voices are still likely to argue that pressure on services costs remains too high for comfort, but that is more an argument for gradualism than for a pause.
But with a debate already starting on where the ECB's rate cuts should end, consensus may be more difficult to maintain with each future cut.
Trump last week demanded that the Fed cut interest rates but the bank resisted on Wednesday, arguing that inflation was still elevated and it was not in a hurry to cut borrowing costs, a signal taken by markets to suggest a longer pause may be ahead.
At 2.75%, the ECB's deposit rate is approaching the 1.75% to 2.50% range considered "neutral", neither fuelling nor dampening economic activity. Trump-induced volatility could intensify calls for the ECB to go below this rate and stimulate growth.
"Markets are pricing a terminal rate of around 2%, which remains broadly consistent with our estimates for a neutral policy rate for the euro area, Konstantin Veit at PIMCO said.
"Nevertheless, we see additional downside risks to euro area growth post US election, and potential for lower terminal rates."
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