La European Central Bank has just taken another small but significant step, reducing the interest rates of 25 basis points. Not a surprising move, but a clear signal that Frankfurt continues to follow a accommodative monetary policy, in the hope of stimulating growth in an uncertain economic context. Expectations are now all focused on words of Christine Lagarde, which could offer crucial insights into the future of the Eurozone economy.
ECB cuts rates again: disinflationary process “well underway”
This cut, the fifth in a row, reflects the updated assessment of the prospects of inflation and wage and price dynamics, with Frankfurt stressing that the disinflationary process is now “well underway”. Although domestic inflation remains high, the ECB expects a return to the 2% target in the medium term, with wage growth moderating, reducing the impact on inflation.
In its statement, the ECB said that recent rate cuts are making borrowing more affordable, but that financing conditions remain tight due to previous rate hikes. The economy is facing challenges, but rising real incomes and the gradual easing of monetary policy should boost demand. The Governing Council is determined to pursue a return to the 2% inflation objective, with future rate decisions guided by economic data and the inflation outlook, without committing to a fixed path.
Central Banks, roads divided on rates: Fed pause and new ECB cut
This move comes at the end of a 2024 characterized by targeted and constant reductions, which today bring the deposit rates at 2,75%, those on the main refinancing operations at 2,90% and those on marginal lending facility at 3,15%. The message is clear: the Eurozone needs stimulus to avoid the risk of a recession, especially in light of the GDP data that have reawakened the concerns about growth. Making the scenario even more complex are the threats of tariffs advanced by Trump, which could worsen the economic difficulties in Europe. Not only that: also the growing political instability in Germany and France they could also push the ECB to bring forward the cuts, completing them by the summer to counter the risk of stagnation.
In the meantime, the Federal Reserve has decided to keep rates unchanged, stopping between 4,25% and 4,50%. A choice that reflects the caution of the American central bank in dealing with still "high" inflation, which remains a concern.
There's a contrast evident between the two central banksWhile the ECB seems to be sailing towards a “calmer” sea, with the wind of falling rates to stimulate growth, the Fed prefers to maintain a more rigid line to combat inflation, even fearing that a further increase in rates could stifle the recovery.
