The European Central Bank cut interest rates for the fourth time this year and kept the door open to further easing in 2025 as growth takes a hit from political instability at home and the risk of a fresh trade war with the US.
The ECB has been easing policy rapidly this year as inflation worries have largely evaporated and the debate has shifted to whether it is cutting rates fast enough to support a stagnant economy that is falling behind its global peers.
Predicting that inflation will be back at its 2% target in early 2025 and growth will remain sluggish, the ECB lowered its deposit rate to 3% from 3.25%, in line with expectations, and changed its guidance, which is likely to be taken as a hint of further rate cuts.
“Most measures of underlying inflation suggest that inflation will settle at around the governing council’s 2% medium-term target on a sustained basis,” the ECB said, removing a previous promise to keep policy “sufficiently restrictive”.
By removing this reference to restrictive policy, the ECB is signalling a return to at least a neutral setting for policy, where it neither stimulates nor slows growth.
However, this signal was weaker than many economists had expected, especially given a warning that domestic inflation remains high.
While “neutral” is an imprecise term, most policymakers put it between 2% and 2.5%, suggesting that further rate cuts are coming before the ECB gets there.
The bank insisted it was not committing to any particular policy path, however, and said it would retain optionality.
“The governing council is not pre-committing to a particular rate path,” the ECB said.
Although economists were almost unanimous in predicting Thursday’s move, many had acknowledged that a bigger cut would also be justified given a deteriorating growth outlook and rapidly retreating inflation.
These were precisely the reasons why the Swiss National Bank cut its own key rate by a bigger-than-predicted 50 basis points earlier in the day, taking the benchmark rate to just 0.5%.
The SNB said geopolitical tensions, including US trade policy, could result in weaker growth and Europe was also facing political uncertainty.
While no ECB policymaker explicitly argued for a 50 basis cut in the runup to the meeting, several pointed out that risks for lower growth and inflation were mounting.
These fears were confirmed in the ECB’s own economic projections, which showed that growth will be lower than already muted expectations and a recovery would be both shallow and delayed.
With Germany facing an early election, France struggling to find a stable government and the incoming US president Donald Trump threatening punitive tariffs, the outlook is dominated by downside risks.