Unlock the Editor’s Digest for free every week and discover top stories handpicked by Roula Khalaf, the Editor of the Financial Times. In this edition, we delve into the European Central Bank’s (ECB) recent decision to cut interest rates by a quarter of a percentage point, setting them at 3 percent. This move marks a shift away from its previous hawkish stance, acknowledging that economic growth might not be as robust as previously hoped.
This latest rate cut, the fourth since June, brings the ECB’s benchmark deposit rate to its lowest since March 2023. While some members of the ECB, led by President Christine Lagarde, had considered a larger 50 basis-point cut, they ultimately reached a unanimous decision for the quarter-point reduction.
Deutsche Bank’s economist Mark Wall commented, “The path for additional rate cuts has been made clearer,” signifying the ECB’s more dovish approach as the Eurozone, especially Germany, grapples with slowing growth and looming trade tensions posed by Donald Trump’s presidency.
Thursday’s rate cut coincided with the ECB’s revised economic outlook, predicting the Eurozone’s GDP will grow just 1.1 percent in 2025, a slight downgrade from the 1.3 percent forecast in September. The growth projections for 2026 and 2027 are also lowered to 1.4 percent and 1.3 percent, respectively. Lagarde noted, “The downside risks, particularly to growth, have shifted.”
Lagarde also addressed Trump’s proposed tariffs of up to 20 percent on all US imports, which aren’t yet factored into these growth forecasts. If those tariffs are implemented after Trump’s return to office on January 20, the export-dependent Eurozone economy could fare worse than current estimates suggest.
By late afternoon, the euro had dipped by 0.2 percent, trading at $1.047. In a notable policy shift, the ECB dropped its previous stance of maintaining “sufficiently restrictive” policy rates to manage inflation at its 2 percent target. Instead, it now emphasizes that the effects of restrictive monetary policy will diminish over time.
Lagarde conveyed to journalists, “The direction is clear,” hinting at further rate cuts next year, although she emphasized that these decisions will be made one meeting at a time. While acknowledging that it’s not “mission accomplished” on inflation, Lagarde remarked that the ECB is now “really on track” to maintain their 2 percent inflation target sustainably.
The bank forecasts headline inflation to be 2.1 percent in 2025, dip slightly to 1.9 percent in 2026, and rise again to 2.1 percent in 2027. Dean Turner, chief Eurozone economist at UBS Global Wealth Management, believes the ECB may need to take more action to support the economy in 2025, but he anticipates that any further rate cuts will likely occur later in the year rather than immediately.
Investors are betting on more aggressive rate cuts from the ECB compared to the US Federal Reserve next year, considering the anticipated slower growth in the Eurozone relative to the US. “Gradual easing is the message,” stated Mariano Cena, senior European economist at Barclays.
Following the ECB’s decision, traders in swaps markets mostly kept their projections stable. They largely anticipate an additional five quarter-point cuts by the next September, which would lower the deposit rate to 1.75 percent. Derek Halpenny from MUFG noted that if economic data further weakens, particularly with uncertainties around trade tariffs, “a larger cut would be feasible.”
In comparison, swaps markets are currently pricing in about 0.75 percentage points of rate reductions from the US Federal Reserve within the same timeframe, potentially bringing the target range down to between 3.75 and 4 percent. Additionally, in a surprising move, the Swiss National Bank cut its main policy rate by half to 0.5 percent earlier in the day.
