The European Central Bank’s interest rate cut has been making headlines as the institution moves decisively to tackle a sluggish economy and tame inflation. On December 12, 2024, the ECB announced its fourth rate cut of the year, reducing the deposit rate by 25 basis points to 3%.
The European Central Bank started its rate-cutting cycle in June 2024, a significant reversal after years of tightening monetary policy. The aim has been to stimulate the Eurozone economy, which has been hovering near recession due to weak growth and political instability. The most recent cut brings the deposit facility rate to 3%, while the main refinancing rate and marginal lending facility stand at 3.15% and 3.4%, respectively.
ECB President Christine Lagarde justified the decision, citing “abundant uncertainty” and “downside risks to growth.” Although inflation in the Eurozone has fallen closer to the ECB’s target of 2%, economic growth remains stubbornly weak. The Eurozone economy is projected to grow by just 0.8% this year and 1.1% in 2025, far below the global average.
By reducing rates, the ECB aims to make borrowing cheaper, encouraging spending, investment, and overall economic activity. However, some policymakers believe the cuts may not be aggressive enough.
What Does the Latest Rate Cut Signal?
The European Central Bank meeting in December revealed a subtle yet important shift in its policy outlook. The central bank removed language from its guidance that previously emphasized the need to keep rates “sufficiently restrictive.” Economists interpret this as a clear indication that the ECB is now in an easing phase and could continue cutting rates in 2025.
Lagarde was cautious in her statements but acknowledged that the “disinflation process is well on track.” She also pointed to new downside risks, such as trade tensions with the U.S. and political uncertainty in key Eurozone economies like Germany and France. For instance, Germany is heading toward early elections in February 2025, while France is grappling with political turmoil following a no-confidence vote.
Despite this uncertainty, markets are optimistic about further rate cuts. Investors are pricing in a series of cuts through mid-2025, with some projecting that the deposit rate could drop to 1.75% by the end of 2025.
Impacts on the Economy and Markets
The European Central Bank’s interest rate cut has far-reaching implications for businesses, consumers, and financial markets. For businesses, reduced borrowing costs can encourage investment in growth initiatives. For consumers, lower interest rates make loans and mortgages cheaper, boosting household spending.
However, the decline in returns on cash deposits may put savers under pressure. The deposit rate, which determines how much banks earn for parking money with the ECB overnight, directly influences savings account rates.
Final Thoughts
The European Central Bank’s interest rate cut reflects its determination to support the eurozone’s struggling economy. While inflation is stabilizing, growth forecasts remain subdued, and political uncertainty looms large. Additional rate cuts in 2025 appear likely, but as Lagarde emphasized, the ECB’s decisions will depend on evolving economic data.