Richard Parks The European Central Bank (ECB) cut its key interest rate by 0.25% to 3% on Thursday, citing progress toward its 2% inflation target. President Christine Lagarde expressed confidence in controlling inflation but warned of potential risks to economic growth.
Cautious Rate Cut Reflects Inflation Progress
The ECB’s latest decision marks its fourth rate cut since June, aimed at supporting the economy while ensuring inflation remains under control. During the Governing Council’s discussion, a larger 50 basis point cut was considered, but consensus favored a more moderate 25 basis point reduction.
“We are currently restrictive,” Lagarde noted. “But the situation is different now, as we are much closer to our target.” The ECB also removed its previous commitment to keeping rates “sufficiently restrictive,” signaling confidence in achieving its inflation goal.
Inflation Down, But Growth Worries Persist
The ECB’s projections show inflation continuing to decline: 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. Core inflation, which excludes energy and food, is expected to average 2.9% in 2024 and fall to 1.9% by 2026. Lagarde highlighted wage growth and service sector costs as remaining pressures but affirmed that inflation is on track.
Meanwhile, economic growth in the eurozone is slowing. The ECB downgraded GDP growth forecasts to 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026. Lagarde cited weak investment, export performance, and sluggish manufacturing as key challenges.
Data-Driven Path Forward
Looking ahead, Lagarde stressed that the ECB’s decisions will remain data-dependent and made on a meeting-by-meeting basis. She dismissed speculation about a larger rate cut in January, emphasizing the need to carefully balance inflation control and economic support.
“We are much closer to our target, but we are not done,” Lagarde said, pointing to ongoing domestic inflation pressures and wage growth.
The ECB remains cautious amid uncertainties caused by geopolitical tensions, trade disruptions, and fiscal challenges. “The level of uncertainty we are facing is significant,” Lagarde concluded.