The European Central Bank (ECB) lowered its key interest rate by 0.25% to 3% on Thursday, citing confidence in reaching its 2% inflation target while warning of slowing economic growth. ECB President Christine Lagarde highlighted weak investment and growth momentum as key concerns.
Policy Shift with Caution on Growth Risks
This rate cut marks the ECB’s fourth since June. The decision comes with an important policy change: the ECB removed its earlier commitment to keeping rates “sufficiently restrictive for as long as necessary.” Lagarde noted that although monetary policy remains restrictive, the ECB is now closer to achieving its inflation goal.
“There were discussions about a larger 50 basis point cut,” Lagarde revealed, “but the consensus favored a 25 basis point reduction.” This decision reflects the ECB’s cautious approach, balancing inflation control with signs of economic slowdown.
Inflation Declining, but Wage Pressures Persist
The ECB’s latest projections show inflation continuing to decline: 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. Core inflation, which excludes energy and food, is expected to average 2.9% in 2024 and 1.9% by 2026.
Lagarde expressed confidence that inflation is on track but warned of lingering wage and service sector pressures. “Domestic inflation has edged down but remains high,” she noted. Geopolitical tensions and potential energy price hikes pose further risks.
Eurozone Growth Slows Amid Weak Investment
The rate cut comes as the eurozone struggles with slowing growth. Lagarde pointed to declining manufacturing, sluggish services, and weak investment. The ECB now forecasts GDP growth of 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026.
Despite challenges, the labor market remains strong, with employment up 0.2% in the third quarter and unemployment at a historic low of 6.3%. Lagarde expects recovery to be driven by higher real incomes and more affordable credit.
Data-Driven Approach Continues
Addressing speculation about future rate cuts, Lagarde reaffirmed the ECB’s data-dependent stance. “We will decide meeting by meeting and not pre-commit to any rate path,” she said. While the ECB has cut rates by 100 basis points this year, Lagarde emphasized the need to balance inflation control with supporting a weakening economy.
She also warned of rising uncertainty due to geopolitical tensions, trade disruptions, and fiscal challenges within the eurozone. “The level of uncertainty we face is significant,” Lagarde concluded.