Frankfurt (Germany) (AFP) – The European Central Bank cut interest rates again Thursday and signalled more to come as the eurozone economy flatlines, while warning of trade tensions and uncertainty amid US President Donald Trump’s protectionist agenda. The central bank cut its benchmark deposit rate by a further quarter point to 2.75 percent, its fifth reduction since June last year and a move widely expected by observers. The ECB’s decision stands in contrast to the latest move by the US Federal Reserve. The central bank in the United States, whose economy has been outpacing the eurozone’s, on Wednesday left its key lending rate unchanged and said it was in no “hurry” to make changes, despite pressure from Trump for more cuts.
The ECB had previously hiked borrowing costs aggressively to tame runaway energy and food costs, but is now bringing them back down as price rises slow and the eurozone economy falters. A recent uptick in inflation, which rose to 2.4 percent in December, above the ECB’s two-percent target, has caused some jitters. But policymakers believe price pressures will ease, and their focus has shifted to relieving the strain on the beleaguered 20-nation eurozone, which has been registering meagre growth. After the ECB’s rate call, central bank chief Christine Lagarde warned the single currency area’s economy was set to “remain weak in the near term.”
She signalled that, as most economists expect, more cuts were coming, stating, “we know the direction of travel — this is the direction that we will take.” With Trump threatening sweeping tariffs on imports into the United States, including from Europe, Lagarde also warned that upheavals to trade could hit the eurozone. “Greater friction in global trade could weigh on euro area growth,” she said, while also warning that trade tensions could have an impact on eurozone inflation.
Some economists have voiced fears that higher tariffs could potentially stoke inflation in the United States and beyond, hampering the work of central bankers in keeping a lid on prices. But while she hinted at future cuts, Lagarde stuck to the ECB’s position of refusing to firmly commit to future moves, warning that “we are facing significant and probably rising uncertainty at the moment.” Most analysts were, however, convinced that more cuts were on the cards for the ECB. ING analyst Carsten Brzeski said the ECB “looks set to continue the current rate cut cycle,” adding that current levels of borrowing costs were “too restrictive for the eurozone economy’s current weak state.”
The eurozone has been hobbled by issues ranging from high energy costs to a manufacturing slowdown. Data released before the ECB’s meeting showed the eurozone economy registered zero growth in the final quarter of 2024, despite expectations for a slight expansion. For the whole of 2024, it registered just 0.7 percent growth — a far cry from the rates seen in rivals the United States and China.
Germany, the single currency area’s biggest economy, has weighed particularly heavily. As well as a languishing economy, the country is facing political uncertainty as it heads for early elections next month following the collapse of the government in Berlin. Similar turbulence in France, where a new government took office in December following the ouster of its predecessor, is also muddying the outlook. Most analysts believe the ECB will cut rates at its forthcoming meetings, although there is debate over how low they will take them. They caution it is hard to say what Trump will ultimately do, making the path ahead difficult for ECB officials.
“It is not yet clear what effect the change in the White House will have,” said Jens-Oliver Niklasch, an analyst from LBBW bank. “The ECB would do well to stick to its approach of making decisions from meeting to meeting.”
© 2024 AFP
