The European Central Bank (ECB) cut its key interest rate on Thursday, meeting market expectations, as it seeks to boost an economy that continued to struggle in the last quarter of the year.
The cut comes a day after the U.S. Federal Reserve (Fed) held off on reducing rates, underlining the contrast between more robust growth in the U.S. economy and stagnation in Europe, which recorded zero growth at the end of last year.
The ECB’s rate-setting council cut the benchmark rate by a quarter percentage point to 2.75% at a meeting at its skyscraper headquarters in Frankfurt, Germany, with the focus on growth overtaking anxiety about inflation, which has fallen to near the bank’s target of 2%.
This marked the fifth consecutive rate cut since the ECB initiated its easing cycle last June.
The ECB faces a juggling act since lower rates, while they help growth by making borrowing money more affordable, can fan inflation. Although inflation is down from its peak of 10.6% in October 2022, it is still above the target and rose to 2.4% in December on higher energy prices.
Europe’s economy stagnated at the end of last year as its former growth engine, Germany, finished a second straight year of shrinking output, officials said Thursday.
Gross domestic product (GDP) was flat with a zero increase in the final quarter of 2024 in the 20-nation eurozone, the EU statistics agency Eurostat said.
"The disinflation process is well on track," the ECB said.
"Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay," the ECB added. "But wage growth is moderating as expected, and profits are partially buffering the impact on inflation."
ECB policymakers were likely to have breathed a sigh of relief at their meeting after U.S. President Donald Trump's new administration did not impose blanket trade tariffs as feared, although the threats he made have cast a shadow on the outlook.
Tariffs tend to depress economic growth and if there is retaliation, raise inflation, which would put a question mark over the ECB's easing plans.
ECB President Christine Lagarde holds her regular news conference at 1:45 p.m. GMT. Investors are likely to listen for any comments on trade, high services sector inflation and volatile financial markets.
With Thursday's decision, the ECB also lowered the rate at which banks can borrow from it for a week – to 2.90% from 3.15% – and for a day, to 3.15% from 3.40%.
