European Central Bank Cuts Interest Rates as Eurozone Economy Stalls

European Central Bank President Christine Lagarde addresses a press conference at the central bank's headquarters in Frankfurt am Main, Germany, on Jan. 30, 2025. Kirill Kudryavtsev/AFP/Getty Images

The European Central Bank (ECB) lowered interest rates on Thursday and hinted more cuts are likely coming, signaling it’s prioritizing actions that address sluggish economic growth over concerns about lingering inflation.

The ECB delivered a 25-basis-points cut on Jan. 30, bringing its key deposit facility rate to 2.75 percent. The move marks the ECB’s fifth rate cut since June, with markets expecting two or three more this year amid growing confidence that inflation is continuing to cool and economic weakness demands action.

“The disinflation process is well on track,” ECB President Christine Lagarde told a press conference after the decision was announced.

Lagarde avoided telegraphing future rate moves, noting that the central bank would take a “data-dependent and meeting-by-meeting approach.” However, Lagarde’s assessment of the economic situation, coupled with her view that rates at 2.75 percent are still restrictive, strongly suggests more cuts.

“The economy stagnated in the fourth quarter,” she said, adding that it is “set to remain weak in the near term.”

The euro area manufacturing sector continued to contract, she noted, while pointing to “fragile” consumer confidence making households reluctant to boost their spending.

While headline inflation rose to 2.4 percent year over year in December 2024, up from 2.2 percent in November 2024, Lagarde said this was expected and mostly reflected the fact that past drops in energy prices were no longer factoring into the inflation calculations.

“We expect inflation to fluctuate around its current level in the near term,” she said. “It should then settle sustainably at around the two percent medium-term target,” she said, adding that easing labor cost pressures and improvement in underlying inflation measures point to inflation reliably falling to target, which gives room for the ECB to continue on its rate-cutting cycle.

Lagarde’s remarks on economic sluggishness came as Eurostat, the European Union’s statistical agency, released data on Thursday indicating that the eurozone economy was at a near standstill, growing at a paltry pace of 0.1 percent year over year in the fourth quarter of 2024. By comparison, the Bureau of Economic Analysis (BEA) reported on Thursday that U.S. gross domestic product (GDP) grew at an annualized rate of 2.3 percent in the fourth quarter, reflecting robust consumer spending.

According to the latest data released on Jan. 30, unemployment in the euro area also rose from 6.2 percent in November 2024 to 6.3 percent in December 2024. By contrast, the unemployment rate in the United States dipped to 4.1 percent in December from 4.2 percent in November, reflecting strong labor demand.

Given the economic weakness in the euro area, the rate cut came as little surprise despite December’s slight uptick in inflation.

“Despite somewhat stickier headline inflation, the sluggishness of the eurozone economy as well as the ECB’s strong conviction that inflation will return to target were strong arguments for today’s rate cut,” analysts at ING wrote in a note.

The ING team believes that another rate cut at the ECB’s March meeting is “almost a done deal.”

“Looking ahead, the latest data once again confirmed that the ECB is currently looking at a mild version of stagflationary tendencies: continued sluggishness of the economy and accelerating inflation,” ING analysts wrote in a separate note. “Still, the ECB seems to be looking through this temporary acceleration of inflation and sounds determined to continue cutting interest rates.”

The ECB’s Thursday rate cut contrasts with the Federal Reserve’s decision a day earlier to hold rates steady at a range of 4.25 percent to 4.5 percent. Fed officials cited “solid” labor market conditions coupled with “somewhat elevated” levels of inflation.