The European Central Bank (ECB) cut its deposit rate by 25 basis points to 3%, marking its fourth reduction this year. This decision reflects growing concerns over weakening eurozone economic growth and persistently high inflation. ECB President Christine Lagarde emphasized that the move aims to support economic stability as geopolitical risks mount.
One critical concern is the potential impact of President-elect Donald Trump’s proposed tariffs on European goods, which could significantly strain trade relations. Economists predict that such policies may necessitate further rate cuts in 2025, potentially dropping rates as low as 2%.
This rate adjustment underscores the ECB's challenges in balancing inflation control with economic support. Inflation, at 2.3% in November, is forecasted to reach the ECB’s 2% target by mid-2025, with economic growth expectations for the eurozone revised to just 1.0% in 2025.
Lagarde pointed to the need for a cautious approach, citing uncertainties related to U.S. trade policies and political instability in major EU economies, including France and Germany. These issues pose significant risks to Europe’s recovery efforts.
Despite speculation of a larger 50 basis-point cut, most ECB policymakers favored a conservative 25-point adjustment, signaling caution in navigating uncertain global conditions. Analysts also anticipate further euro weakening due to divergent monetary policies between Europe and the U.S.
Looking ahead, the ECB faces increasing pressure to address the fallout of geopolitical risks and trade disruptions. Economists warn that compounded challenges may force rates to drop to unprecedented levels in the coming years.
This decision reflects the ECB’s broader strategy to shield the eurozone economy from external shocks while adapting to evolving fiscal and trade landscapes.
