Christine Lagarde, the president of the European Central Bank, which has made progress reining in inflation in recent months.
Credit...Annabelle Gordon/EPA, via Shutterstock

ECB Cuts Interest Rates as the Economy Weakens

The bank has been lowering rates since June as inflation slowed, but other risks are growing, including the threat of higher tariffs promised by President-elect Donald J. Trump.

by · NY Times

The European Central Bank lowered interest rates on Thursday, the fourth cut this year amid growing concerns that the region’s economic outlook is darkening.

Policymakers reduced the bank’s deposit rate by a quarter point, to 3 percent, in a move widely expected by investors. The bank, which sets rates for the 20 countries that use the euro, has been lowering rates since June as inflation slowed toward its target of 2 percent.

In November, inflation averaged 2.3 percent across the region, slightly higher than in previous months as energy prices rose. The bank forecast inflation will average 2.1 percent next year.

There is “not yet the victory against inflation, not yet mission accomplished,” Christine Lagarde, the president of the central bank, said on Thursday at a news conference in Frankfurt. But at their final policy meeting for the year, officials acknowledged that “inflation was really on track” to meet their 2 percent target, she added.

Policymakers did discuss whether a larger half-point cut was warranted, but they all ultimately agreed to the quarter-point reduction, Ms. Lagarde said.

Substantial progress has been made reining in inflation in recent years after it peaked above 10 percent in late 2022, but other risks are accumulating. Europe faces the prospect of higher tariffs on its goods exported to the United States imposed during the second term of President-elect Donald J. Trump. And political turmoil in Germany and France, the bloc’s two largest economies, is adding to the uncertainty.

Lawmakers, economists and other policy officials have spent much of the past year warning about Europe’s waning competitiveness, but it is not clear how European leaders will come together to make the necessary changes. That has increased the pressure on the central bank to support the economy with lower interest rates.

As inflation has slowed in Europe and the United States, central bankers have eased their monetary policy. But in recent months, there are growing distinctions between the banks over how fast and how much they need to lower rates.

Earlier on Thursday, the Swiss National Bank cut rates by a larger-than-expected half-point as its currency, considered a haven during times of geopolitical stress, has strengthened. Next week, the U.S. Federal Reserve is expected to cut rates after inflation data published on Wednesday added to confidence of slowing price growth. And the Bank of England is expected to hold rates next week, continuing its gradual approach to easing amid concerns the recent government budget will add to price pressures.

“The governing council is determined to ensure that inflation stabilizes sustainably at its 2 percent medium-term target,” the European Central Bank said on Thursday. But it removed a reference to rates needing to stay “sufficiently restrictive.”

The eurozone economy is “losing momentum,” Ms. Lagarde said on Thursday. Staff at the European Central Bank had expected economic growth to be weak in the medium term but had forecast a stronger recovery later as lower interest rates encourage investment, foreign demand increases and wages outpace inflation. But on Thursday, the staff slightly lowered its forecasts for the recovery.

Growth in the eurozone is now expected to be 1.1 percent next year, down from a forecast of 1.3 percent three months ago.

In recent weeks, investors have increased bets on how quickly interest rates will fall after suggestions from some policymakers that rates would need to be cut faster. Fabio Panetta, the governor of the Bank of Italy, warned that there was a risk that inflation could undershoot the bank’s target. “Restrictive monetary conditions are no longer necessary,” he said last month.

Investors are betting that policymakers will lower the deposit rate to 2 percent next spring. They slightly pared back their bets on Thursday during Ms. Lagarde’s news conference as she said the central bank was “not done” stamping out inflation.

More friction in global trade from the threat of U.S. tariffs and retaliatory measures would weigh on the eurozone economy and make the inflation outlook more uncertain, the bank said. A trade war would be a blow to Europe’s manufacturing base, hampering an already troubled car industry, for example. Economic confidence could also take a hit, wiping out the prospect of a recovery driven by consumer spending.

Last month, the central bank warned that low growth and rising geopolitical tensions was increasing concerns about the levels of sovereign debt in eurozone countries.

On Thursday, Ms. Lagarde said that it was “crucial to swiftly follow up, with concrete and ambitious structural policies” that build on the proposals by Mario Draghi, the former European Central Bank president, to improve competitiveness, and by Enrico Letta, a former Italian prime minister, to strengthen the region’s single market.

For a long time, policymakers have been imploring lawmakers to make changes, such as further integrating capital markets, and to stick to sustainable fiscal rules, which would ease the burden on monetary policy and central bankers to support the region’s economy.

“Everybody has to do their job,” Ms. Lagarde said. “The central bank cannot be the jack-of-all-trades.”

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