ECB cuts rates again as euro zone hit by economic, political woes

FRANKFURT - The European Central Bank (ECB) cut interest rates again on Dec 12, citing a worsening growth outlook and slowing inflation, with political turmoil in the euro zone adding to the troubled picture.

The central bank for the 20 countries that use the euro reduced its key deposit rate a quarter point to 3 per cent, as widely expected.

It was the ECB’s third cut in a row and fourth since June, when it kicked off its current easing cycle.

After hiking borrowing costs from mid-2022 to combat runaway energy and food costs, policymakers have turned their attention to lowering rates as inflation eases and the euro zone economic outlook darkens.

Worse-than-expected data, as well as the Swiss central bank making an unexpectedly large rate reduction earlier on Dec 12, had fuelled speculation the ECB could deliver a hefty, half-percentage-point cut for the first time in the easing cycle.

But rate-setters opted to continue cutting at the same pace, with a quarter-point reduction, as inflation remains stubborn, having rebounded back above the ECB’s 2 per cent target in November.

The slowdown in inflation is “well on track”, the ECB said in a statement announcing its decision.

It cut its inflation forecasts for 2024 to 2.4 per cent and to 2.1 per cent in 2025 – down 0.1 percentage point in each case.

“Most measures of underlying inflation suggest that inflation will settle at around the governing council’s 2 per cent medium-term target on a sustained basis,” it said.

But the central bank added that it now expects a “slower economic recovery” than several months ago, and cut its growth forecasts slightly for 2024 and the following two years – to 0.7 per cent, 1.1 per cent and 1.4 per cent, respectively.

The statement dropped previous language on keeping rates “sufficiently restrictive for as long as necessary”, saying instead that it was “determined to ensure that inflation stabilises sustainably” around the ECB target.

Investors are now set to follow ECB president Christine Lagarde’s press conference for clues about the pace going forward, with analysts predicting she may offer hints of cuts in the months ahead.

Trump jitters

The move by the Swiss National Bank earlier on Dec 12, which brought its main rate down to 0.5 per cent, reflected “uncertainty” about the economic outlook amid political upheaval in the US and Europe.

ECB officials have likewise raised concerns about the weakening growth outlook in the single-currency area, signalling a shift away from being laser-focused on bringing down inflation.

Euro zone inflation peaked at 10.6 per cent in late 2022 after surging in the wake of Russia’s full-scale invasion of Ukraine and amid post-pandemic supply chain woes.

It fell back under the ECB’s 2 per cent target in September but rebounded in subsequent months, reaching 2.3 per cent in November.

Political headwinds are adding to the tricky terrain that rate-setters will have to navigate.

Germany is heading for elections in February, seven months earlier than scheduled, after the collapse of Chancellor Olaf Scholz’s long-troubled coalition in November. Even before the latest turbulence, the euro zone’s biggest economy was struggling with a manufacturing slowdown, and its anaemic growth rates are weighing down the broader single currency area.

Meanwhile in France, the euro zone’s second-biggest economy, the government of Mr Michel Barnier was ousted last week in a historic no-confidence vote, deepening the country’s growing political and financial chaos.

Adding to the troubled picture is Donald Trump’s impending return to the White House.

He has threatened to slap hefty new tariffs on all imports to the US, and has previously singled out the European Union as the bloc runs a sizeable trade surplus with the world’s biggest economy.

The ECB’s decision comes a week ahead of the US Federal Reserve’s next rate-setting meeting on Dec 17 and 18, with markets betting on another cut in borrowing costs. AFP