Slowing Down the Economy's Headwinds: A Look at the ECB's Recent Moves
Central Bank lowers lending rate for the eighth time since summer 2024, fuelling speculation about halting the series of decreases.
Europe's economy is facing several challenges, and the European Central Bank (ECB) is making moves to address these issues. Here's a breakdown of the current situation and the ECB's recent actions.
Easing the Pressure: ECB's Monetary Policy
In response to a potential trade dispute with the United States and falling inflation, the ECB took steps to loosen monetary policy. This included a 0.25 percentage point reduction of the deposit rate for banks and savers to 2.0%. As a result, companies can borrow money for investments more cheaply, which may stimulate the economy. However, this means that savers can expect even lower interest rates on savings accounts and time deposits.
ECB President Christine Lagarde stated that the bank is "well positioned" to navigate the current uncertainty, indicating that the ECB may have reached the end of its interest rate cutting cycle, but some uncertainties remain, such as the outcome of the trade dispute between the European Union and the US.
A Changing Landscape: The Future of Interest Rates
Economists expect that the ECB will not significantly lower interest rates in the near future, with Ulrich Kater, chief economist at Dekabank, mentioning "We are slowly reaching the end of the staircase of interest rate cuts." However, there could be one or at most two more steps before the ECB reaches a new equilibrium.
Florian Heider, director of the Frankfurt-based Leibniz Institute for Financial Market Research SAFE, sees no need for further monetary easing, stating that economic problems are often structural in nature.
Trade Issues: A Toxic Brew for the Economy
The ECB Council's decision to lower interest rates in June was expected, as inflation in the eurozone has dropped significantly, removing an argument for higher interest rates. In May, the inflation rate fell to 1.9%, below the ECB's target rate.
Meanwhile, the trade dispute with US President Donald Trump is adding to the economic challenges. This uncertainty alone is poisonous, as ECB Vice President Luis de Guindos recently emphasized.
A Mixed Bag: Weak Economy, but Rising Government Spending
Despite the trade dispute, the ECB still expects the economy in the eurozone to grow by 0.9% this year and 1.1% in 2026. While uncertainty about trade policy could hinder investment and exports in the short term, rising public spending on defense and infrastructure is expected to support growth over the medium term. Additionally, with increased wages and more favorable financing conditions for companies, consumers may spend more, further boosting the economy.
Inflation: Declining Faster Than Expected
The ECB expects inflation to decline faster than previously expected. For 2025, the central bank expects inflation to be 2.0%, while it projected a rate of 2.3% in March. In 2026, inflation is expected to be 1.6%, well below the target rate, according to the latest ECB forecast.
Remember, higher inflation erodes purchasing power, as people can afford less for a euro. Central banks also aim to avoid persistently falling prices, as companies and consumers might delay investments in hopes of cheaper prices, ultimately slowing down the economy.
As for the recent speculation about Lagarde's early departure from the ECB, she has dismissed these reports, expressing her determination to finish her term, which ends in October 2027.
Business leaders and economists are closely watching the European Central Bank's (ECB) upcoming decisions, as the bank's recent actions to ease monetary policy could impact the financial sector and general-news headlines. The ECB's moves are in response to challenges such as a potential trade dispute with the United States, falling inflation rates, and economic uncertainty. ECB President Christine Lagarde indicated that further interest rate cutting may be limited, but the future of interest rates still holds uncertainties. In the business world, economists predict that there may be only one or two more steps in the ECB's interest rate cutting cycle before reaching a new equilibrium. However, the outcome of the trade dispute between the EU and the US remains a significant concern, as it has the potential to add to the economy's headwinds.
