European Central Bank cuts rates amid stalled growth

The European Central Bank lowered interest rates by 25 bps to 2.75% at the end of last week, its fifth straight cut, as it pivots from fighting inflation to tackling sluggish growth, it said in a statement. The eurozone economy has been struggling — Germany and France’s economies shrank in 4Q 2024, Italy’s flatlined, and Spain managed 0.8% growth, Reuters reports.

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Analysts saw this coming: A rate cut “should be an easy decision,” European economist at BofA Global Research Evelyn Herrmann told Bloomberg ahead of the ECB’s rate cut, adding that “after that, things could get more interesting and possibly more controversial.” Markets are pricing in at least three more cuts this year, with a terminal rate near 2%.

The rationale: Policymakers say rising real incomes and fading monetary restrictions should boost demand, but weak exports, shrinking industry, and cautious consumers could deepen the slowdown. “Uncertainty is weighing on growth in the here and now in Europe,” PGIM’s Katharine Neiss told Bloomberg, citing trade war fears.

The ECB isn’t worried about inflation: While inflation ticked up to 2.4% in December, the ECB believes it’s “well on track” to return to target, pointing to easing wage growth and softer demand.

How far will the cuts go? At 2.75%, rates are already nearing the estimated “neutral” range of 1.75%-2.50%. Policymakers are divided; Greece’s Yannis Stournaras backs a 2% rate by mid-year, but hawks like the Netherlands’ Klaas Knot warn that the ECB is nearing its limit. The central bank signaled it will take a “data-dependent and meeting-by-meeting approach.”

Trump’s tariffs add uncertainty: The ECB’s move comes after the US Fed held rates steady last week, with Chair Jerome Powell flagging uncertainty under President Donald Trump. Analysts warn that new tariffs on European exports could stall growth and force the ECB to act more aggressively, even as high services prices, rising energy costs, and weak productivity pose fresh inflation risks.

THE CLOSING BELL-

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