ECB Cuts Rates for Fifth Time, Signals More Loosening Ahead
Key Points:
* ECB lowers deposit rate by 25 basis points to 2.75%, in line with expectations.
* Policy stance remains "restrictive," indicating further rate cuts are possible.
* Inflation close to 2% target, easing concerns despite recent uptick.
* Eurozone economy remains fragile, posing downside risks due to global trade tensions.
Details:
The European Central Bank (ECB) has cut borrowing costs for the fifth time since June, as the region's economy stalls and inflation approaches the 2% target. Policymakers reduced the deposit rate to 2.75%, as predicted by analysts.
Despite the rate cut, the ECB maintains a "restrictive" monetary policy stance, suggesting that further easing may be in the pipeline. President Christine Lagarde emphasized that the central bank is not pre-committing to a specific rate path due to heightened uncertainty.
Investors interpreted the ECB's cautious language as a sign of future rate cuts. Market bets on additional easing have increased, with analysts expecting up to three more quarter-point reductions by year-end. This has boosted eurozone bonds, sending the two-year German yield down 10 basis points to 2.18%.
Policymakers remain confident that inflation will meet the 2% target this year, despite recent upticks. Lagarde expressed concern about the stuttering eurozone economy, which unexpectedly stagnated in late 2024. The potential impact of US trade tariffs remains a source of uncertainty.
Economic indicators point to persistent weakness in the eurozone. Business surveys show modest improvement, but the Composite Purchasing Managers' Index (PMI) only recently entered expansionary territory. Germany and France have experienced political turmoil that has contributed to output contractions.
Lagarde acknowledged the fragility of the European economy and highlighted downside risks stemming from global trade frictions. She noted that surveys indicate ongoing contraction in manufacturing and fragile consumer confidence.
Some policymakers advocate for further rate cuts to stimulate economic growth. Analysts suggest that a neutral rate of 2% to 2.25% may be necessary, implying at least two more reductions.
Despite concerns, inflation remains within the ECB's target range. Lagarde expressed confidence that wage moderation will keep services inflation in check. The central bank's forecast projects inflation close to 2% from the second quarter.
Officials have recently expressed optimism about achieving their inflation target. Governor Francois Villeroy de Galhau stated that he is "vigilant but not worried" about inflation. The ECB's statement emphasizes that disinflation is "well on track" and that underlying inflation measures suggest a sustained convergence towards the target.