He European Central Bank cut its reference interest rate by 25 basis pointsat 3%, in response to a upcoming inflation to its 2% target and a downwardly revised growth forecast for the eurozone.
This Thursday is the fourth interest rate cut that the European Central Bank has undertaken since June, which incidentally announced that it will gradually abandon its restrictive monetary policy.
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“The disinflation process continues to advance” in the eurozone although it is accompanied by “a slower economic recovery” than that projected in September, the 25 members of the Council of Governors, chaired by Christine Lagarde, noted in a statement.
The euro zone economy “is losing momentum,” said the president of the ECB at a press conference, alluding to the contraction of the manufacturing sector and the weak growth of the services sector.
“Companies are slowing investment spending due to weak demand and very uncertain prospects. Exports are also weak, it is difficult for some European industries to remain competitive,” Lagarde noted.
With this cut in its reference rate, the ECB takes another step in its measures to reduce the cost of new credit for companies and households. This cycle follows a period of drastic monetary adjustment to address high inflation, related to the war in Ukraine and the post-COVID recovery.
Most observers were betting on this scenario: the guardians of the euro giving up a more significant rate cut, of 0.5 percentage points, in the face of lower growth and a rapid fall in inflation.
The decision “reflects a compromise between those who worry about growth and those who worry about inflation…, between doves and hawks,” said Carsten Brzeski of ING bank.
New economic projections published by the ECB on Thursday led the institution to lower its growth forecasts for 2024 to 2026 and its inflation forecasts for 2024 and 2025.
According to the ECB, inflation in 2024 will reach 2.4% (previously projected 2.5%), and in 2025 it will fall to 2.1% and in 2026 to 1.9%.
Likewise, the institution forecasts eurozone GDP growth of 0.7% in 2024, against the 0.8% previously forecast; 1.1% in 2025 and 1.4% in 2026.
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Lagarde also warned of the “risk of greater friction in international trade,” which could “undermine growth in the euro zone, slowing exports and weakening the global economy.”
To date, the ECB stated that rates should remain “restrictive for as long as necessary” to return inflation to around its target.
But, this time, the institution noted that “over time, the gradual disappearance of the effects of restrictive monetary policy should support a recovery in domestic demand.”
For Carsten Brzeski, “the abandonment of the reference to a ‘restrictive’ monetary policy suggests the possibility of other rate cuts in 2025.”
EAM