ECB Cuts Interest Rates Amid Economic Concerns

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank (ECB) cut interest rates on Thursday and indicated further reductions in March as concerns over weak economic growth overshadow inflation worries.

This marked the fifth rate cut since June, with expectations for two or three additional cuts this year, driven by the belief that the substantial inflation surge is nearly contained and the struggling economy requires support.

“We know the direction of travel,” stated ECB President Christine Lagarde at a press conference following the decision.

Lagarde added, “At which pace, with what sequence, what magnitude, will be informed by the data we will collect in the coming weeks and months and by the analysis our staff will conduct.”

Three ECB policymakers mentioned to Reuters that they foresee a rate cut in March occurring smoothly prior to more heated discussions within the Governing Council regarding further easing measures.

With the eurozone’s economy stagnating in the last quarter, impacted by industrial recession and weak consumer spending, the ECB is likely to adhere to its easing path, particularly as the U.S. Federal Reserve maintains current rates and suggests an extended pause.

Policymakers likely felt reassured after new U.S. President Donald Trump’s administration opted against broad trade tariffs, although fears of such tariffs have cast a shadow over the economic outlook.

Lagarde noted the potential “global negative impact” of tariffs on growth while pointing out that their influence on inflation is “far more complicated” because of potential retaliation and market adjustments.

Domestic Weakness

If a rate cut occurs in March, it would reduce the ECB’s deposit rate to 2.5%, the upper end of what is deemed the neutral range, a level that neither promotes nor hinders economic activity according to ECB staff estimates.

The three policymakers speaking to Reuters anticipated a more extensive discussion regarding lowering borrowing costs below this range, a move previously suggested by board member Isabel Schnabel.

Despite easing wage growth among the 20 euro currency nations, a softening labor market, the decline in early-year oil prices, and stabilization of the dollar, inflation remains above the ECB’s target. Poor productivity growth and labor shortages may sustain price pressures, limiting how far the bank can ease.

Anticipating this debate, Lagarde indicated that ECB staff would release a new neutral rate estimate on February 7. Last week, she revised her estimate to a range of 1.75%-2.25%.

“We are not at the neutral rate. This is a debate that is entirely premature,” she remarked.

“We will base our monetary policy stance on a staff research paper and analysis as we approach this target.”

Most economists predict further rate cuts. Nomura stated in a client note, “We maintain our view that the ECB will lower rates below the neutral rate to support the economy. We project a terminal rate of 1.75% by September 2025, with potential for further cuts if U.S. tariffs prove more burdensome than anticipated.”