ECB cuts interest rates again as inflation eases and growth falters
Frankfurt softens the hawkish bias that has colored its policy for the last three years, but it still sees policy as restrictive after a fourth cut this year.
The European Central Bank cut its key interest rate by a quarter-point to 3.0 percent, reflecting continued progress in bringing inflation down and growing concerns about the state of the economy.
While the decision — a fourth cut in seven months — was widely anticipated, there had been some speculation on a larger half-point cut, after a series of weak data in recent months suggested the economy might have already ground to a standstill, even before an expected onslaught of trade tariffs next year from U.S. President-elect Donald Trump.
But its updated forecasts, published on Thursday, show the ECB still expects decelerating inflation to be flanked by continued growth — albeit somewhat weaker than before.
The ECB also refrained from offering new guidance on the expected speed and scope of interest rate cuts next year, repeating that it will stick to a “data-dependent and meeting-by-meeting approach.”
However, in a sign that it no longer feels the need to hold the economy back to tame inflation, the Bank removed a sentence pledging to “keep policy rates sufficiently restrictive for as long as necessary.” That commitment had been in all of its recent policy statements. It also suggested that “the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.”
While policymakers stress that there is no knowing at what level interest rates stop being restrictive, most estimates for the ‘neutral rate’ range between 2 and 2.5 percent.
“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2 percent medium-term target on a sustained basis,” the ECB said. Staff trimmed their inflation forecasts for 2025 to 2.1 percent from 2.2 percent and continue to see it averaging 1.9 percent in 2026. The Bank’s first forecast for 2027 puts inflation at 2.1 percent.
The Bank’s staff were slightly more pessimistic on the growth outlook, trimming their 2025 forecast to 1.1 percent from 1.3 percent. They expect it to accelerate to 1.4 percent in 2026, from 1.5 percent previously. The first 2027 projections 1.3 percent.
For some, the shift in messaging wasn’t enough.
“The ECB must react and speed up the pace of rate cuts, unless low confidence derails the nascent recovery and jeopardizes the return to price stability,” said S&P Global Ratings chief EMEA economist Sylvain Broyer in emailed comments. “Following a cut of 25 [basis points] this week, a commitment to cut rates further back-to-back until the deposit rate reaches neutrality is required.”
Similarly, UBS, Chief Eurozone Economist Dean Turner said “the risks are tilted towards the ECB having to do more, not less, to support the economy in 2025.”
At the opening of her regular press conference, ECB President Christine Lagarde acknowledged that the economy had lost momentum. Financial markets will be looking for any clearer signs of concern economic headwinds, which have gained strength due to the policy drift in Germany and political gridlock in France. Any such signals could be a hint for more aggressive rate cuts next year.
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