ECB cuts rates as expected, signaling openness to further easing

The European Central Bank lowered interest rates by 25 basis points to 2.75%, in line with expectations, while signaling a willingness to continue easing as weak economic growth takes precedence over lingering inflation concerns.

This marks the ECB’s fifth rate cut since June, with financial markets pricing in two to three more reductions this year. Policymakers argue that the worst inflation surge in decades is nearly under control, while the struggling economy requires further support.

The ECB reaffirmed that disinflation remains on track and welcomed a slowdown in wage growth, which is expected to ease inflationary pressures in domestically driven sectors.

With the eurozone economy stagnating in the final quarter of 2024 due to an industrial slowdown and weak consumer spending, the ECB appears committed to its easing path, even as the U.S. Federal Reserve has opted to keep rates unchanged, signaling a prolonged pause.

ECB officials likely found some relief in U.S. President Donald Trump’s decision not to impose broad trade tariffs as initially feared, though ongoing trade risks continue to cloud the economic outlook.

Economic data from the eurozone’s largest economies remains bleak. Germany and France contracted in the final quarter, while Italy stagnated. Spain was the only major economy in the bloc to record positive growth.

Inflation, which stood at 2.4% in December, is expected to take a few more months to return to the ECB’s 2% target. However, policymakers see little reason to doubt that inflation is trending in the right direction.

Wage growth is moderating, the labor market is softening, oil prices have retreated from early-year highs, and the U.S. dollar’s recent strengthening appears to have paused.

While some within the ECB remain concerned about persistent service sector costs, this is seen as an argument for gradual rate reductions rather than a pause in easing.

As discussions emerge over where the ECB’s rate-cutting cycle should end, maintaining consensus among policymakers may become increasingly difficult with each additional cut.