FX.co ★ ECB To Cut Rates Again As Lagarde Sees Disinflation "Well On Track"

The European Central Bank (ECB) reduced its interest rates for the fourth consecutive policy meeting on Thursday, signaling more potential easing as policymakers aim for neutrality amidst the slowing growth in the Eurozone and inflation expectations aligning with the target throughout the year.

Led by ECB President Christine Lagarde, the Governing Council decreased the deposit rate by 25 basis points to 2.75%. Similarly, the main refinancing rate and the lending rate were adjusted to 2.90% and 3.15%, respectively.

Since September, the central bank has consistently trimmed interest rates by 25 basis points at each policy session. According to a statement from the ECB, "The disinflation process is progressing well." The bank reaffirmed its belief that inflation is aligning with staff predictions and anticipated to meet the Governing Council’s 2% medium-term target within the year.

The ECB emphasized that monetary policy remains restrictive but expects that rising real incomes and the diminishing impact of previous monetary constraints will gradually boost demand. During a press briefing, Lagarde noted that the decision to cut rates was unanimous, and it remains "premature" to discuss ending the policy easing. Unlike the U.S. Federal Reserve, which maintained an unchanged federal fund rate on Wednesday, the ECB is expected to continue reducing rates, with the next potential cut eyed for March.

Commerzbank economists predict the ECB will lower rates three times, by 25 basis points each, by midyear. Jorg Kramer, an economist at Commerzbank, anticipates, "The next move will likely be in March when the ECB releases updated inflation and GDP projections. We foresee the deposit rate reaching 2.0% by midyear."

Carsten Brzeski, an ING economist, indicated that Lagarde's press conference suggested a strong inclination to further reduce rates. "Remaining in restrictive territory, moving to neutrality seems imminent, but not the final goal," Brzeski remarked. "Lagarde’s focus on economic developments could evolve into more dynamic action." The ECB reiterated its commitment to a data-driven, meeting-by-meeting policy framework without pre-committing to any specific rate pathway.

Official data, released earlier on Thursday, showed the Eurozone economy stagnated in the final quarter of 2024. In her policy statement, Lagarde mentioned that the economy is expected to remain weak in the short term due to ongoing manufacturing shrinkage and subdued household consumption, even with rising real incomes.

Nevertheless, Lagarde highlighted that conditions for recovery are still present. A strong labor market and more accessible credit are anticipated to enhance consumer confidence and spending. However, risks to economic growth continue to be skewed to the downside. In December, ECB staff downgraded their growth projections.

Price increases in the euro area hit a five-month high of 2.4% in December, while core inflation remained steady at 2.7%. The ECB perceives potential upward risks to euro area inflation from unexpectedly higher wages or profits, as well as geopolitical tensions that may elevate commodity prices, freight costs, and impact global trade.