The ECB has cut rates by 0.25% to 3%, citing progress toward its 2% inflation target and warning of downside growth risks. Lagarde noted signs of slowing momentum and weak investment. A larger cut was debated, but consensus formed around 25 basis points. Policy remains data-driven.
The European Central Bank (ECB) cut its key interest rates by 25 basis points on Thursday, lowering the deposit facility rate to 3%.
President Christine Lagarde described the move as a sign of growing confidence that inflation is steadily converging towards the ECB’s 2% medium-term target, while cautioning about persistent downside risks to economic growth.
In a significant policy shift, the ECB’s December statement removed its prior commitment to keeping interest rates “sufficiently restrictive for as long as necessary”, to achieve the 2% goal.
While Lagarde stressed that monetary policy remains restrictive, the removal of this phrase signals progress in achieving the inflation goal.
“We are currently restrictive,” she affirmed. “But the situation is different now, as we are getting much closer to our target.”
During the press conference, Lagarde also disclosed that the Governing Council had debated a larger 50 basis point rate cut but ultimately reached a consensus around the 25 basis point move.
“There were some discussions, with some proposals to consider possibly 50 basis points,” she noted. “But the overall agreement, to which everybody rallied, was that 25 basis points was actually the right decision.”
ECB’s Lagarde pledges inflation progress, but warns of wage risks
The rate cut, the ECB’s fourth since the current easing cycle began in June, reflects an updated assessment of inflation and growth dynamics.
The ECB’s updated macroeconomic projections show inflation continuing to decline over the coming years. Staff forecast headline inflation to average 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026, before edging slightly higher to 2.1% in 2027.
Excluding energy and food, inflation is projected to average 2.9% in 2024, 2.3% in 2025, and 1.9% in both 2026 and 2027.
Lagarde expressed confidence that underlying price pressures are aligning with the ECB’s medium-term goals.
“Most measures of underlying inflation suggest that inflation will settle at around 2%,” she said, adding that “inflation is really on track”.
However, she mentioned that certain pressures, particularly in wages and services inflation, remain resilient.
“Domestic inflation has edged down but remains high,” she said, citing wage adjustments and delayed sectoral price reactions to prior inflation spikes.
Overall inflation risks, however, are now considered “more two-sided” than before. Upside risks stem from geopolitical tensions that could push energy prices higher, while downside risks include weaker consumption and investment due to low confidence.
Growth losing momentum amid weak investment and exports
The ECB’s rate cut comes as the eurozone economy grapples with a slowdown. Lagarde highlighted that “the latest information suggests [growth] is losing momentum”, with survey data pointing to a contraction in manufacturing and slowing growth in services.
However, there are bright spots. The labour market remains resilient, with employment growing by 0.2% in the third quarter and the unemployment rate holding steady at a historic low of 6.3% in October.
Lagarde also noted that recovery is expected to be driven by “rising real incomes”, more affordable credit, and a rebound in domestic demand.
Despite these positives, the ECB downgraded its economic growth projections. Eurozone gross domestic product is now forecast to grow by 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026.
“The recovery is slower than expected,” Lagarde acknowledged, citing weak investment and export performance.
While the ECB’s projections indicate a return to its inflation target, Lagarde cautioned that risks to growth remain tilted to the downside.
“Trade frictions, geopolitical tensions, and the lagged effects of monetary policy tightening could weigh further on growth,” she explained.
Lagarde sticks to a meeting-by-meeting approach
When asked about market expectations for a potential 50 basis point cut at the next meeting in January, Lagarde dismissed speculation, reiterating the ECB’s commitment to a data-driven approach. “We will continue to be data-dependent, we will continue to decide meeting by meeting, and we are not pre-committing to a particular rate path,” she clarified.
“We are much closer to our target, but we are not done,” she said, citing domestic inflation pressures and wage growth that still require careful monitoring.
While the ECB has now lowered rates by 100 basis points across four cuts this year, Lagarde maintained that policy adjustments would be carefully calibrated to balance inflation control with support for the slowing economy.
Lagarde also highlighted the heightened uncertainty facing the eurozone, driven by geopolitical tensions, trade frictions, and fiscal challenges in some member states. “If there is one thing that we discussed in the last two days, it’s the level of uncertainty that we are facing,” she said.
