ECB lowered interest rates again

Euro area growth outlook worsens

The European Central Bank cut interest rates again on Thursday, citing a deteriorating growth outlook and slowing inflation. The political turmoil in the euro area adds to the worrying picture.

As expected, the central bank of the twenty euro-using countries cut the base deposit rate by a quarter of a point to three percent.

This is the ECB's third consecutive rate cut and the fourth since June, when the bank began its current easing cycle.

After raising interest rates since mid-2022 to tackle runaway energy and food prices, policymakers have now started to cut them again as inflation slows and the euro area's economic outlook darkens.

The worse-than-expected results and the Swiss central bank's decision on Thursday to cut interest rates sharply fuelled speculation that the ECB could cut interest rates by half a percentage point for the first time in the current easing cycle.

However, the ECB decided to continue to cut at the same pace, i.e. by a quarter of a percentage point, as inflation remains stubbornly persistent, once again breaching the ECB's two per cent target in November.

The slowdown in inflation is "proceeding smoothly", the ECB said in a statement announcing the decision.

The bank cut its inflation forecasts to 2.4% in 2024 and 2.1% in 2025, down 0.1 percentage point in both cases.

"Most of the underlying inflation indicators suggest that inflation will settle around the two per cent medium-term target set by the Governing Council," the statement said.

However, the central bank added that it now expects a "slower economic recovery" than a few months ago and slightly lowered its growth forecasts for 2024 and the next two years to 0.7%, 1.1%, and 1.4%, respectively.

The statement dropped the previous wording about interest rates being "sufficiently restrictive to the extent necessary" and instead said that the bank is "committed to ensuring that inflation stabilises sustainably" at the ECB's target.

Ch. Lagarde says eurozone economy "losing momentum"

The eurozone economy is "losing momentum" as the manufacturing sector is contracting and growth in the services sector is slowing, European Central Bank President Christine Lagarde said on Thursday.

In addition, "the risk of greater frictions in global trade could have a negative impact on euro area growth as exports decline and the global economy weakens", Chancellor Lagarde told a news conference. Lagarde said at a press conference in Brussels.

Concerns about Trump

Earlier on Thursday, the Swiss National Bank cut its key interest rate to 0.5%, reflecting "uncertainty" about the economic outlook amid political turmoil in both the United States and Europe.

ECB officials have also expressed concern about weakening growth prospects in the single currency area, signalling that they are no longer focused on reducing inflation.

At the end of 2022, euro area inflation peaked at 10.6%, following Russia's invasion of Ukraine. The fact that supply chains had not yet recovered from the pandemic also contributed.

Inflation fell below the ECB's 2% target in September this year, but recovered in the following months, reaching 2.3% in November.

Political headwinds are adding to the already difficult situation in which ECB officials have to navigate.

Following the collapse of Chancellor Scholz's coalition in Germany last month, the country will hold snap elections in February, seven months ahead of schedule.

Even before the recent turmoil, the euro area's largest economy was struggling with a slowdown in production, and its anaemic growth rate is weighing on the whole single currency area.

Meanwhile, in France, the second largest economy in the euro area, Michel Barnier's government was ousted last week in a historic vote of no confidence. This further deepened the growing political and financial chaos in the country.

The imminent return of Donald Trump to the White House adds to this gloomy picture. The President-elect has threatened to impose new tariffs on all imports into the United States. He has previously singled out the EU, as the bloc has active trade with the world's largest economy.

The ECB's decision comes a week before the next US Federal Reserve rate-setting meeting on 17 and 18 December. Markets are expecting another cut in borrowing costs.

Based on ELTA reports