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E-mail Xinhua, January 31, 2025
FRANKFURT/BRUSSELS, Jan. 31 (Xinhua) -- The European Central Bank (ECB) decided on Thursday to cut key interest rates by 25 basis points aimed at scaling back the restrictive monetary policies implemented to combat persistent inflation in the euro area.
SLUGGISH GROWTH
The zero growth in the eurozone during the fourth quarter (Q4) of 2024 fell short of analysts' expectations, who had anticipated at least a modest expansion following a tentative 0.4 percent gross domestic product (GDP) increase in the third quarter.
On an annual basis, seasonally adjusted GDP increased by 0.9 percent in the eurozone, and by 1.1 percent in the European Union (EU) in Q4 of 2024. This followed growth rates of 0.9 percent and 1.0 percent respectively in the previous quarter, according to a flash estimate published Thursday by Eurostat.
A preliminary estimate of 2024's annual GDP growth, based on seasonally and calendar-adjusted quarterly data, shows an increase of 0.7 percent in the eurozone and 0.8 percent in the EU.
"After the energy and inflation shock, we returned to growth at the start of last year, but 2024 ended back in stagnation mode," said Bert Colijn, chief economist at the Amsterdam-headquartered financial services corporation ING.
Among member states, Portugal recorded the highest quarterly growth at 1.5 percent in Q4 of 2024, followed by Lithuania at 0.9 percent and Spain at 0.8 percent.
Meanwhile, Ireland's economy contracted by 1.3 percent, while the German and French economies, the EU's "twin engines," saw declines of 0.2 percent and 0.1 percent respectively in Q4 of 2024.
Year-on-year growth rates were positive in nine countries, and negative in three.
The bloc remains under pressure from a deepening industrial recession, high energy costs and sluggish spending by both consumers and the government. A weakening labor market and the risk of a trade war with the United States have further fueled concerns, according to consultancy Trading Economics.
5TH RATE CUT
Following the flash estimate of sluggish eurozone economic data, the ECB on Thursday decided to lower key interest rates by 25 basis points.
After the rate cuts, the interest rates on the deposit facility, main refinancing operations and marginal lending facility will be decreased to 2.75 percent, 2.9 percent and 3.15 percent respectively, with effect from Feb. 5, the central bank said in a press release.
This is the fifth rate cut since the central bank began easing monetary policy in June last year. The decision to lower the rates was based on an "updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission," it said.
"The disinflation process is well on track," said ECB President Christine Lagarde. She explained that nearly all indicators of inflation are going down.
While repeating that it is determined to pursue its mandate by bringing inflation sustainably at 2 percent in the medium term, the ECB insisted that it will stick to its data-dependent and meeting-by-meeting approach to determine its future monetary policies.
The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time, said the press release.
BLEAK OUTLOOK RAISES RATE CUT BETS
After the ECB rate cut, Lagarde said at a press conference that the eurozone economy is expected to remain weak in the near term. This aligns with economists' predictions, who expect further rate cuts later this year.
"Here's the summary: Weakness is all around us, while other major economies continue to grow," Colijn said, forecasting that economic stagnation will extend into the first quarter of 2025.
Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics said: "The stagnation in eurozone GDP in Q4 supports our view that the region's economic prospects are worse than most think."
He added that this weakness is likely to push the ECB to cut interest rates more aggressively this year than markets currently anticipate.
Carsten Brzeski, the global head of Macro for ING Research, believed that the ECB has more ground to cover in terms of rate cuts since the monetary policy is "too restrictive for the eurozone economy's current weak state."
Lagarde previously hinted at a "neutral rate" for this year -- a level that neither restricts nor stimulates the economy, signaling the ECB's cautious stance as it balances supporting growth while ensuring inflation stabilizes around the 2 percent target. Now, economists project that the central bank could ease further.
"The economic recovery is still facing headwinds. Disinflation remains on track. Interest rates are restrictive. There is really no reason to think the ECB won't continue to cut rates, at least to a neutral level, and we think quite probably below neutral by year-end," said economist Mark Wall at Deutsche Bank. Enditem
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