The European Central Bank (ECB) lowered interest rates on Thursday and indicated the possibility of further policy adjustments, prioritizing concerns over sluggish economic growth over persistent inflation issues.
This marks the fifth rate reduction by the ECB since June, with market expectations suggesting two or three additional cuts this year. This outlook is based on the belief that the significant inflation increase seen in recent decades is nearing resolution, while the struggling economy requires support.
The ECB emphasized that disinflation is "well on track" and expressed approval of the deceleration in wage growth, which is anticipated to contribute to lowering inflation in the economy's domestic sector.
"Wage growth is moderating as anticipated, and profits are partially cushioning the inflationary impact," the ECB stated in a release accompanying the decision.
With the eurozone economy experiencing stagnation in the last quarter due to an industrial downturn and weak consumer spending, the ECB is expected to continue its easing strategy, even as the US Federal Reserve opted to maintain its rates and suggested a prolonged pause.
ECB officials likely felt a sense of relief during their meeting, as the new administration under US President Donald Trump refrained from implementing widespread trade tariffs, despite the lingering concerns his threats have created regarding future economic conditions.
She is anticipated to reiterate her longstanding position that the policy direction is unmistakable and that the potential for a trade war with the United States could further undermine already fragile growth.
In the last quarter of 2024, both Germany and France experienced economic contractions, while Italy showed no growth, leaving Spain as the sole country among the euro zone's major economies to report positive growth.
Danske Bank economist Piet Haines Christiansen remarked prior to the decision that the European Central Bank (ECB) appears to be at ease with the market's pricing and the financial conditions as reflected by the markets.
Christiansen further noted that while the more dovish members may prefer slightly looser conditions, they are unlikely to pursue this issue at the moment, nor do they believe they could successfully advocate for it.
Inflation, which climbed to 2.4 percent in December, may take several months to return to the ECB's target of 2 percent, but there is little to dispute the notion that the situation is progressing as expected.
Wage growth is slowing, the labor market is becoming softer, oil prices have retreated from their early-year peaks, and the dollar's persistent strengthening appears to have stabilized for the time being. Although some may still contend that the pressure on service costs remains uncomfortably high, this perspective supports a gradual approach rather than an immediate halt.
