The European Central Bank (ECB) cut its benchmark interest rate again by a quarter-point to 2.75% on Thursday as inflation nears 2% and growth remains weak.
As analysts anticipated, the ECB reduced its interest rates on Thursday afternoon during its January meeting.
Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.75%, 2.90% and 3.15% respectively, with effect from 5 February 2025.
The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the rate on the deposit facility is what banks can use to make overnight deposits with the Eurosystem. The rate on the marginal lending facility offers overnight credit to banks from the Eurosystem.
“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.,” an ECB statement said.
Eurozone economy stagnates
The latest ECB monetary policy decision comes as the eurozone economy grounded to a halt in the fourth quarter of 2024, according to earlier preliminary data from Eurostat, with Germany and France, the bloc’s two largest economies, posting worse-than-expected contractions.
Eurozone gross domestic product (GDP) remained unchanged from the previous quarter, a sharp slowdown from the 0.4% growth recorded in the third quarter and below the 0.1% expansion forecast by analysts. It marks the weakest performance since the fourth quarter of 2023, as Euronews’ Piero Cingari reported.
For the broader European Union (EU), GDP edged up 0.1% quarter-on-quarter. On an annual basis, seasonally adjusted GDP increased by 0.9% in the euro area and 1.1% in the EU, slightly improving from the previous quarter’s readings of 0.9% and 1.0%, respectively.
The biggest drag on growth came from Germany and France, which both unexpectedly contracted, Cingari further noted.
Germany’s economy shrank by 0.2%, worse than the anticipated 0.1% decline, while France’s GDP fell by 0.1%, missing expectations of stagnation. Meanwhile, Italy’s economy remained flat for a second consecutive quarter, defying projections of a modest 0.1% increase.
On the other hand, some peripheral economies outperformed, with Portugal (+1.5%) leading the growth rankings, followed by Lithuania (+0.9%) and Spain (+0.8%).
The weakest performances were recorded in Ireland (-1.3%), Germany (-0.2%), and France (-0.1%).
The weaker-than-expected GDP figures strengthened expectations that the ECB would cut interest rates at its policy meeting today.
