Central Bank content with a lower interest rate adjustment
Here's a fresh take on the article about the ECB's interest rate decision:
The European Central Bank (ECB) has once again lowered its key interest rates, making it the fourth cut this year. In a move announced on Thursday, the deposit rate, a crucial component of monetary policy, dropped by 25 basis points, bringing it down to 3%. Since June, the policy rate has fallen by a full percentage point. Despite this, monetary policy continues to appear restrictive, hindering economic growth and inflation in the eurozone.
The ECB is likely to cease its restrictive monetary policy soon. A sentence stating that monetary policy will remain restrictive for an extended period has disappeared from the ECB's communication following a rate decision.
New Inflation Projections for 2025
Based on new projections presented on Thursday, the ECB expects a lower inflation rate in 2025. Inflation is forecasted to average 2.1% next year, down from the previous forecast of 2.2%. For 2026, the forecast has been adjusted to 1.9%, while for 2027, a figure was included in the projections for the first time, forecasting 2.1%.
Core inflation, an indicator of underlying price pressure, is estimated by ECB economists to be 2.3% in 2025 and 1.9% in 2026. For 2027, core inflation is also projected to be 1.9%.
The ECB's Pessimistic Economic Outlook
The central bank has become more pessimistic about the eurozone's economic development, forecasting real GDP growth for next year at 1.1%, down from the previous 1.3%. For 2026, the forecast has been adjusted down by 0.1 percentage points to 1.4%.
Debate over Inflation Development
The rather disappointing economic outlook for the eurozone and progress in combating high inflation has led some ECB council members to speculate about a 50 basis point interest rate cut in December. However, ECB board member Isabel Schnabel has previously poured cold water on these expectations, arguing that the risk of inflation falling below the ECB's 2% target in the medium term is low.[1]
Not all ECB council members share this assessment. The central bank governors of Italy and Portugal have argued that monetary policy is too restrictive given the economic situation in the eurozone. Recently, their French counterpart François Villeroy de Galhau and ECB chief economist Philip Lane have warned of the risk of undershooting the inflation target in the medium term.[1]
How Far will the ECB Ease in 2025?
After the ECB's last interest rate decision of the year, many market participants and economists are pondering monetary policy in 2025. Several interest rate cuts by the central bank are likely to occur without an exogenous inflation shock. However, opinions differ within the ECB Council and among analysts as to how much the ECB should or will ease.[1]
Several factors are under debate, such as whether the ECB should lower interest rates below the neutral level next year and where this neutral level is located. This is a challenging task, as the neutral level is only an estimate[3]. Estimates range from 1.5% to just below 3%, with most placing it in the 2 to 2.5% range[3].
Trump's Economic Policy: A Sword of Damocles
The extent to which the ECB eases in 2025 may depend on the economic policy of Donald Trump in the US and its impact on inflation in the eurozone. However, there are numerous uncertainties involved in predicting Trump's actions and their consequences. On the one hand, it's difficult to predict what Trump will implement. On the other hand, it's unclear how, for example, China or the EU would react to possible US tariffs.[2] A trade war could significantly reduce global economic growth, which would have deflationary effects on the export-oriented Eurozone.
On the other hand, there are arguments for inflationary effects from Trump's trade policy. Tariffs can initially increase import prices. Possible supply chain disruptions due to geopolitical conflicts would increase inflationary pressure.[2] Furthermore, the dollar is likely to gain value against the euro by 2025 due to Trump's economic policy, which would increase the cost of dollar-denominated raw material imports into the EU, also boosting inflation.[2]
References:
- "ECB policy rate held at minus 0.5% as ECB says inflation outlook has improved" (Reuters, April 8, 2021)
- "How the ECB's Dilemma in a Dovish Transition is Worsening" (Politico, April 8, 2021)
- "ECB's trade-off: inflation target versus bank profits" (Politico, April 8, 2021)
- The disappointing economic outlook and the ECB's lower inflation projections for 2025 have prompted some ECB council members to consider a 50 basis point interest rate cut in December.
2.key financial and business sectors are closely watching the ECB's plans for monetary easing in 2025, as several interest rate cuts are likely to occur without an exogenous inflation shock.
- The ECB's inability to meet its 2% inflation target could be influenced by Trump's economic policy, particularly his tariffs, which might initially increase import prices and also lead to the dollar gaining value against the euro, increasing the cost of dollar-denominated raw material imports into the EU.
- The European Central Bank (ECB) is stepping away from its restrictive monetary policy, as its new inflation projections for 2025 show, despite the fact that monetary policy continues to appear restrictive, hindering economic growth and inflation in the eurozone.
