The European Central Bank (ECB) has lowered its key interest rate by 0.25% to 3%, signaling confidence that inflation is nearing the 2% target. However, ECB President Christine Lagarde warned of slowing economic growth and ongoing risks.
Rate Cut Reflects Optimism on Inflation Control
Thursday’s rate reduction marks the ECB’s fourth cut since June. The decision to lower rates by 25 basis points was reached after discussions about a potential 50 basis point cut. Lagarde explained that while a larger cut was debated, consensus settled on a more cautious approach.
“We are currently restrictive,” Lagarde stated, referring to monetary policy, “but we are getting much closer to our target.” The ECB’s decision also included dropping its previous commitment to keeping rates “sufficiently restrictive” for as long as necessary, signaling progress toward controlling inflation.
Inflation Easing, But Risks Remain
The ECB’s updated forecasts show inflation averaging 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. Core inflation, excluding food and energy, is expected to decline to 1.9% by 2026. Lagarde expressed confidence that inflation is stabilizing, though she noted wage growth and service sector pressures are still resilient.
“Inflation is really on track,” she said, adding that domestic inflation remains high due to wage adjustments and delayed price responses. Geopolitical tensions and potential energy price hikes continue to pose risks to inflation.
Economic Growth Slows in Eurozone
The ECB’s decision comes as the eurozone economy shows signs of weakening. Lagarde highlighted slowdowns in manufacturing, services, and investment. The ECB has downgraded its GDP growth forecast to 0.7% for 2024, with modest increases to 1.1% in 2025 and 1.4% in 2026.
Despite these challenges, the labor market remains stable. Employment grew by 0.2% in the third quarter, and the unemployment rate held at 6.3% in October. Lagarde noted that recovery could be supported by rising real incomes and improved credit conditions.
Future Policy Decisions Will Be Data-Driven
Lagarde dismissed speculation about a larger rate cut in January, emphasizing the ECB’s commitment to a data-driven approach. “We will decide meeting by meeting and not pre-commit to a rate path,” she said.
The ECB’s careful approach aims to balance inflation control with supporting a slowing economy. Lagarde also warned of uncertainties related to geopolitical tensions, trade disruptions, and fiscal challenges within the eurozone. “The level of uncertainty we face is significant,” she concluded.