ECB cuts interest rates as Eurozone inflation stabilizes
On Thursday, the European Central Bank decided to lower interest rates by 0.25 percentage points. This action is justified by the anticipated achievement of the inflation target of 2 per cent. After the announcement, the euro's exchange rate did not change significantly.
The European Central Bank decided to reduce three main interest rates: the deposit rate will be lowered to 2.75 per cent, the refinancing rate to 2.90 per cent, and the central bank loan rate to 3.15 per cent. The changes will take effect on 5 February 2025.
The ECB Governing Council justifies its decision by the ongoing disinflation process. According to the central bank, core indicators suggest a lasting inflation stabilisation around the set target. Despite persistent high domestic inflation, mainly due to delayed wage and price adjustments in some sectors, wage growth is gradually decreasing.
Impact on the economy
The latest interest rate cuts gradually reduce the costs of new loans for companies and households. However, the bank notes that "financing conditions remain restrictive." Previous rate hikes still affect existing loans, particularly those refinancing maturing obligations.
The ECB expects that rising real incomes and a gradual weakening of the effects of restrictive monetary policy will contribute to increasing demand over time despite current economic difficulties. The bank will continue a data-driven policy without committing to a predefined path for interest rates.
Rates unchanged in the US. Trump's reaction
On Wednesday, a decision on interest rates was made in the US. The Fed did not change them. Former US President Donald Trump immediately called on the Federal Reserve to lower interest rates. In his speech at the World Economic Forum in Davos, Trump emphasised that interest rates should be reduced in the United States and globally. His comments were his first public attacks on the Fed since he was president.
Trump repeatedly criticised his appointed Fed Chairman, Jerome Powell. During his first term, Trump had controversial relations with Powell. The former president believes monetary policy should be more lenient to support economic growth. His statements caused slight increases in the stock market, and the yield on 2-year Treasury bonds fell slightly.
ECB decision in line with forecasts
Experts have commented on the latest ECB decision. - The ECB's decision is due to weakening economic activity in the eurozone and a gradual stabilisation of inflation, which, according to ECB forecasts, is expected to fall below 2 per cent in the coming months - write analysts from the investment platform Portu.
As they note, despite elevated core inflation (2.7 per cent y/y) and rising service prices (+4 per cent y/y), the central bank acknowledged that the economic growth outlook necessitates further easing monetary policy. - The industrial sector continues to contract, and Germany recorded its second consecutive year of negative GDP growth. Currently, the market anticipates 2-3 more cuts by the end of the year, which could bring the deposit rate to the 2.00-2.25 per cent range by December - highlight Portu analysts.
Analysts: FED must remain independent
Analysts point out that the Federal Reserve's independence is crucial for the stability of financial markets. The Fed does not intend to make decisions under political pressure. Currently, interest rates in the US are 4.25-4.5 per cent, and the first cut may occur only in June. Experts predict that inflation will gradually decrease, allowing for the easing of monetary policy.
Trump blames his predecessor Joe Biden's policy for the rise in inflation, pointing to excessive budget spending. The former president believes that the current economic situation results from flawed decisions by the Biden administration. Fed representatives declined to comment on Trump's statements, emphasising the importance of the central bank's independence.
