European Central Bank cuts rates amid stalled growth

The European Central Bank lowered interest rates by 25 bps to 2.75% yesterday, its fifth straight cut, as it pivots from fighting inflation to tackling sluggish growth, according to 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.

Analysts saw this coming: A rate cut this week “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%, meaning further easing could stimulate the economy. 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 this 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.

MARKETS THIS MORNING-

Asian markets are mixed this morning, with Japan’s Nikkei and Topix up marginally after the company published inflation and unemployment figures, and South Korean markets opening lower following a four-day break, following Samsung’s earnings. Over on Wall Street, futures indicate a positive open for Nasdaq after a positive earnings report from Apple, while futures tied to the S&P 500 and the Dow Jones are also up.

THE CLOSING BELL-

The ADX rose 0.2% yesterday on turnover of AED 927.5 mn. The index is up 1.8% YTD.

In the green: Oman & Emirates Investment Holding Co (+14.9%), Hayah Insurance Company (+9.7%) and Rak Properties (+6.0%).

In the red: Eshraq Investments (-3.5%), Al Wathba National Ins. Co. (-3.0%) and Rak Co. for White Cement & Construction Material (-2.5%).

Over on the DFM, the index rose 0.5% on turnover of AED 695.1 mn. Meanwhile, Nasdaq Dubai rose 0.7%.