Euro Area: ECB cuts rates again in January

Euro Area Monetary Policy January 2025

Euro Area: ECB cuts rates again in January

25 basis point reduction meets market expectations: At its meeting on 30 January, the European Central Bank (ECB) decided to cut its deposit rate by 25 basis points to 2.75%. It also cut its refinancing rate and its lending rate by 25 basis points each. The decision fully aligned with market expectations and marked the fourth consecutive interest rate reduction.

Favorable inflation outlook and paltry economic activity motivate move: The decision was primarily motivated by inflation-related factors. The Bank noted that inflation remains high due to delayed adjustments in wages and prices in certain sectors. However, it stated that inflation has evolved in line with expectations and is expected to return to its 2.0% target this year. Moreover, the ECB highlighted that the economy is facing headwinds and that risks to growth are skewed to the downside, which further justified the cut.

ECB to cut further: The Bank’s forward guidance remained markedly dovish. In a subsequent statement, President Lagarde highlighted that interest rates remain restrictive and said that it is premature to discuss the end-point of the ongoing easing cycle. Against this backdrop, all our panelists expect the ECB to deliver another 25 basis points cut at its next meeting on 6 March, and see a cumulative reduction of around 75 basis points by end-2025.

Panelist insight: ING’s Carsten Brzeski commented:

“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. Still, the ECB seems to be looking through this temporary acceleration of inflation, and sounds determined to continue cutting interest rates. The desire to stay ahead of the curve – also in light of potential incoming economic worries for the eurozone stemming from the US administration – remains a compelling reason to return interest rates to neutral.”

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