ECB cuts interest rates again: What does that mean for the economy?

ECB cuts interest rates again: What does that mean for the economy?

The European Central Bank (ECB) cut its key interest rate by 0.25 percentage points to 2.75% on Thursday. This marks the fourth consecutive reduction in the deposit rate and was unanimously decided by the Governing Council of the ECB. ECB President Christine Lagarde said the disinflation process was well underway and inflation was expected to return to the medium-term target of 2% during the year.

Wages are growing more slowly, while inflation remains high in certain sectors. The Governing Council takes a data-dependent approach and does not want to commit to a fixed interest rate path. Markets expect further interest rate cuts totaling 75 basis points in 2025. On February 7th, the ECB will publish a new assessment of the neutral interest rate.

Details about the interest rate cut

The ECB began its rate cutting cycle in June 2024 and continued the adjustments in September, October and December. The new key interest rates will apply from February 5th: deposit rate at 2.75%, main refinancing rate at 2.90% and marginal lending facility at 3.15%. In contrast, the US Federal Reserve (Fed) left its key interest rate unchanged in the range of 4.25% to 4.50%. Likewise, the Swedish Riksbank and the Swiss National Bank each lowered their interest rates by 0.25 percentage points.

Economic data shows that the euro zone stagnated in the fourth quarter, while the German economy contracted by 0.2 percent, largely due to a decline in exports. The deposit rate of 2.75% is seen as restrictive for the struggling Eurozone economy. Lagarde emphasized that the eurozone is still on a recovery path. Analysts expect rate cuts of 0.25 percent during the March 2025 meeting and between 0.5 and 0.75 percent overall by mid-2025.

The interest rate cuts could lead to a rise in the stock market and push up bond prices. However, savings rates on bank accounts are expected to fall, while borrowers will benefit from lower interest rates. However, despite the interest rate cuts, they do not seem to be reaching markets and consumers, leading to rising bond yields in the Eurozone.

The following dates are planned for the next ECB meetings in 2025: January 30, March 6, April 17, June 5, July 24, September 11, October 30 and December 18.

These developments were also reported by the Financial Times Germany which highlights the challenges facing the Eurozone, such as rising energy and freight prices as well as possible political risks.

Additionally reported Morningstar about the current state of the economy in the Eurozone, which is struggling with a stagnant economy and various inflation scenarios.