The European Central Bank cut interest rates on Thursday for the fifth consecutive time, responding to slowing growth in the region’s economy.
Policymakers decreased the bank’s key rate by a quarter point to 2.75 percent, as inflation remained relatively close to their 2 percent target. This decision followed the U.S. Federal Reserve's choice to hold rates steady, highlighting a divergence in the economic outlooks of the United States and Europe.
Christine Lagarde, president of the European Central Bank, stated, “The disinflation process is well on track,” expressing optimism that inflation would return to the target during the year.
Annual inflation in the eurozone was recorded at 2.4 percent in December, a slight increase from the previous month due to rising energy prices.
Central bank policymakers hold differing views on inflation's outlook. Some point to persistent inflationary pressures, particularly in the services sector where price growth remains around 4 percent. Others, including chief economist Philip R. Lane, caution that prolonged high borrowing costs could lead to inflation falling too low. However, the decision to cut rates on Thursday was unanimous, according to Ms. Lagarde.
The eurozone’s economy is projected to remain weak in the near term, with data revealing stagnation in the fourth quarter of last year, following a 0.4 percent expansion in the previous quarter.
This unexpected economic slump increases pressure on central bank officials to implement rate cuts to stimulate growth in a region facing challenges from waning competitiveness with the United States and China, as well as vulnerability to trade disruptions. The German economy, the largest in the bloc, has contracted for two years, burdened by high energy costs, interest rates, and political uncertainty ahead of upcoming elections.
Central bank officials emphasize the need for governments to facilitate cross-border business and investments rather than relying solely on monetary policy for economic growth.
Despite having navigated the worst of the recent inflation crisis, central bankers now encounter new economic risks, particularly concerning potential tariffs from the U.S. If tariffs are imposed and retaliated against, a trade war could disrupt the global economy and impact prices.
Last year, both the U.S. Federal Reserve and the European Central Bank cut rates by a full percentage point, but their future paths appear to diverge.
Traders anticipate additional rate cuts from the eurozone’s central bank at most meetings in the first half of the year, while the U.S. central bank is not expected to reduce rates further, given the resilience of the economy and a strong labor market. President Trump’s policies, including restrictions on immigration and increased tariffs, could heighten inflationary pressures domestically.
Uncertainty surrounding these policies complicates central bankers' ability to predict future actions.
While Europe has not been the primary focus of Trump’s tariff plans, recent developments in Canada, facing a potential 25 percent tariff, illustrate the possible disruptions. Canada’s central bank cut interest rates and removed guidance as it awaited clarity on the tariffs expected to take effect on Saturday.
Ms. Lagarde reaffirmed that the European Central Bank would continue to evaluate each situation at its meetings, avoiding any commitment to a specific trajectory for interest rates. “For those who would like to have this solid forward guidance, it would be totally unrealistic to do anything of that nature,” she stated, citing significant and increasing uncertainty.