ECB cuts rates by a quarter point, lowers growth and inflation outlook

The European Central Bank (ECB) on Thursday cut interest rates for the fourth time this year and left the door open for further easing as inflation continues to approach its target and the economy of the Eurozone remains weak.

The bank also slightly lowered its medium-term growth forecasts and inflation forecasts.

The central bank of the 20 countries sharing the euro zone has cut the rate it pays on bank deposits, which determine financing conditions in the bloc, from 3.25% to 3.0%. It reached a record high of just 4.0% in June.

He also said further cuts are possible by removing the reference to keeping rates “sufficiently restrictive” – economic jargon for a level of borrowing costs that inhibits economic growth.

“Financing conditions are easing, as recent interest rate cuts decided by the Governing Council gradually make new borrowing less costly for businesses and households,” the ECB said. “But they remain tight because monetary policy remains restrictive and past increases in interest rates continue to be reflected in outstanding credit.”

There is no universal definition of what constitutes a restrictive rate, but economists generally see neutral territory, one that neither fuels nor hinders growth, between 2% and 2.5%.

With Thursday’s decision, the ECB also reduced the rate at which it lends to banks for a week – to 3.15% – and for a day, to 3.40%.

These facilities have barely been used in recent years as the ECB has provided the banking system with more reserves than it needed through massive bond purchases and long-term loans.

But they may become more relevant in the future, as these programs end. The ECB confirmed on Thursday that it would stop buying bonds under its pandemic emergency purchase program this month.

The bank also said efforts to bring inflation back to its 2% target were successful.

“The disinflation process is on track,” she said in a statement accompanying the decision.

Lower interest rates are expected to support growth, amid signs of a slowing post-pandemic recovery in the 20 countries that use the euro and fears that US President-elect Donald Trump may impose new tariffs. customs, or import taxes, on goods imported into the United States after arriving in the United States. is inaugurated on January 20.

This brings a chill to the business world in Europe, where exports contribute significantly to growth and employment.

But there are also internal risks.

French Prime Minister Michel Barnier resigned on December 5 after losing a vote of confidence, leaving France without a functioning government and a clear majority in Parliament capable or willing to tackle the country’s excessive budget deficit.

The elections cannot take place before June. Although the end of the Barnier government did not trigger a financial crisis, it adds uncertainty about how long it will take France to restore its finances.

Germany’s governing coalition also dissolved in November and new national elections are expected on February 23. Weeks of coalition negotiations are expected to follow before a new government is in place. That leaves the euro zone’s two largest economies politically adrift for months.

All of this has shaken the confidence businesses need to borrow, invest, expand production and take risks. The S&P Global Purchasing Managers’ Survey Index stood at 48.3 in November, with levels below 50 suggesting a slowdown in the economy. The Sentix survey of investor confidence fell in its first update after the U.S. election, 4.6 points to minus 17.5.

The euro zone economy is expected to grow 0.7% in 2024, instead of the 0.8% forecast in September, the ECB said.

In 2025 and 2026, growth is expected to be 1.1% and 1.4%, respectively.

The inflation rate was forecast at 2.4% for 2024 and 2.1% in 2025, down 0.1 percentage points in each case.