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ECB on Track to Achieve Inflation Goal
Interest rates were lowered by a quarter of a percentage point by the European Central Bank in January 2025, indicating that more easing is anticipated in the months ahead and expressing confidence that inflation will return to its goal later in the year.
The benchmark rate was reduced to 2.75% by the ECB’s governing council, a 0.25 percentage point decrease. The action is perceived as a step toward giving economic growth priority when inflation approaches the bank’s 2% objective. Specifically, the decision to reduce the deposit facility rate—the rate that guides the Governing Council’s monetary policy stance—is predicated on its most recent evaluation of the inflation forecast.
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ECB Signaling Possible Rate Cut
As anticipated, in January 2025, the European Central Bank cut its major interest rates by 25 basis points, bringing the deposit facility rate down to 2.75%, the main refinance rate down to 2.90%, and the marginal lending rate down to 3.15%. With price pressures diminishing as anticipated, this action reflects the ECB’s modified inflation forecast.
The interest rates on the deposit facility, the primary refinance operations, and the marginal lending facility will thus be lowered to 2.75%, 2.90%, and 3.15%, respectively, starting on February 5, 2025. Due to the Eurosystem’s decision to stop reinvesting principal payments from aging assets, the APP and PEPP portfolios are falling at a steady level.
The European Central Bank (ECB) confirmed that disinflation was “well on track” and praised slower wage growth, which could assist decrease inflation in the domestically focused sector of the economy. Arguments that the largest inflation spike in decades is almost over and the economy needs assistance are the reasons behind the ECB’s four reductions in borrowing costs last year and the potential for up to four more in 2025.
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Reason for ECB Rate Cut
Although delayed price and pay adjustments have kept domestic inflation high, wage growth is slowing and some of the inflationary consequences are being absorbed by corporate profits. Although financing conditions remain tight, the rate drop is anticipated to progressively lower borrowing costs for families and businesses.
Despite being over the ECB’s objective of 2.4%, the most recent inflation figure is still predicted to drop to 2.1% this year. At 2.7%, core inflation has been stable since September. The decision to reduce was unanimous, according to ECB President Christine Lagarde, who also stated at a press conference that no Governing Council members had called for a bigger drop of 50 basis points.
Though she is unlikely to make a strong commitment to more cuts, ECB President Christine Lagarde is likely to argue that policy is still headed in the right direction and that the possibility of a trade war with the US might further depress already sluggish GDP.
Concluding Words
The ECB has not committed to a set rate path and is still data-driven, focusing on taking a cautious approach to guaranteeing that inflation stays at its 2% objective. Although it may yet take many months for inflation, which reached 2.4% in December, to return to the ECB’s 2% target, there is no reason to doubt the perception that everything is proceeding as planned.
Due to claims that the largest inflation spike in history is almost over and that the faltering economy requires assistance, the ECB has lowered interest rates five times since June, and markets anticipate two or three more this year. However, it could be harder to get an agreement with each subsequent rate decrease since a discussion about the end of the ECB’s rate cuts has already begun.
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