“We know the direction of travel,” President Christine Lagarde said, describing Thursday’s decision as unanimous. “For those who would like to have this solid forward guidance, it would be totally unrealistic to do anything of that nature, simply because we are facing significant and probably rising uncertainty at the moment.”
Investors took the ECB’s wording on restrictive policy, as well as positive signals from Lagarde on inflation, as an indication that more cuts are coming. Traders upped bets on additional easing, moving close to fully pricing three more quarter-point reductions through year-end.
That boosted the region’s bonds and led the two-year German yield to fall as much as 10 basis points to 2.18% — the biggest daily drop in two months. The euro was slightly up at US$1.0431 ($1.43), supported by a broadly weaker dollar.
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Policymakers have been looking past a recent uptick in inflation, confident that their goal will be met this year and instead fretting about the sputtering performance of the euro zone’s 20-nation economy, which unexpectedly stagnated at the end of 2024.
There’s also the spectre of US trade tariffs, depending on how President Donald Trump’s policy plans take shape. His return is already limiting rate cuts by the Federal Reserve.
Trump’s threat to raise tariffs on European goods remains a major source of uncertainty. But officials have lately emphasized the negative impact such a move could have on economic activity, with few signaling it could reignite prices.
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Fed Chair Jerome Powell, on the other hand, said Wednesday that the US central bank is in no hurry to lower rates further as it waits for the Trump administration to enact its economic policies.
What Bloomberg Economics says...
“Our view is that the ECB will lower rates by 100 bps in total this year. However, we think the pace of easing will probably change to quarterly moves after March from back-to-back adjustments as rates enter the plausible vicinity of neutral. The risk is that growth underwhelms, keeping the ECB cutting at each meeting all the way to 2%.”—David Powell, senior euro-area economist.
For now, the prospects for Europe’s economy are dim. While business surveys by S&P Global showed improvement in January, the Composite Purchasing Managers’ Index only just crossed into territory signalling private-sector expansion.
The region’s failure to grow in the fourth quarter will disappoint the ECB, which projected 0.2% expansion. The weakness is largely down to Germany and France, where political turmoil contributed to contractions in output.
Lagarde said Europe’s economy will remain frail in the near term, with risks to the outlook still tilted to the downside due to the possibility of greater global trade frictions.
“Surveys indicate that manufacturing continues to contract, while services activity is expanding” she told reporters in Frankfurt. “Consumer confidence is fragile and households have not yet drawn sufficient encouragement from rising real incomes to significantly increase their spending.”
Such data have fed calls from some policymakers to trim rates to a level where they cease being a drag on the economy. Most analysts see this threshold at 2% to 2.25%, suggesting the need for at least two more cuts. Loosening is likely to get more controversial as the neutral level, which is hard to observe in real time, draws closer.
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“We are not at the neutral rate,” Lagarde said. “This is a debate that is entirely premature.”
Inflation, meanwhile, hasn’t unduly rattled officials — despite edging up to 2.4% in December. The rocky road back to 2% that they’ve repeatedly warned about is mostly down to volatile energy costs.
One lingering concern is the services sector, where prices are still advancing at an elevated clip. The ECB has argued that more moderate gains in workers’ pay should allow for inflation pressures there to abate, too.
“All the indicators that we have at the moment are heading downward and are confirming our confidence that wages in 2025 will be going down,” Lagarde said.
Policymakers have recently signalled confidence that their mission on prices will soon be fulfilled. Speaking last week on the sidelines of the World Economic Forum in Davos, Bank of France Governor Francois Villeroy de Galhau said he’s “vigilant but not worried” about inflation. The official forecast sees it close to 2% from the second quarter.
Disinflation “is well on track” the ECB said in a statement. “Most measures of underlying inflation suggest that inflation will settle at around the target on a sustained basis.”
