Bank President Christine Lagarde said that efforts to drive down inflation toward the ECB’s 2% target were succeeding, making room to cut rates. “The disinflation process is well on track,” she said in her post-decision statement delivered at a news conference. Fighting inflation is the bank’s main job. She said the bank now foresaw “a slower economic recovery” than it did in a last set of projections in September.
Inflation has fallen steeply to 2.3% from its peak of 10.6% in late 2022, shifting attention from reigning in consumer price increases to worries about ongoing weak growth. The eurozone is expected to grow 0.8% this year and 1.3.% next year, according to forecasts from the European Union’s executive commission.
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Higher ECB central bank benchmarks helped bring down inflation by making it more expensive to borrow and spend and thus taking pressure off prices. For the same reason, rates that are kept too high for too long can undermine growth. The ECB has now cut its benchmark four times from its record peak of 4%.
Lower rates should support growth amid signs that the post-pandemic recovery is slowing in the 20 countries that use the euro currency. Concerns that Trump might impose new tariffs, or import taxes, on goods imported to the US after he is inaugurated on January 20 has sent a cold chill through the business world in Europe, where exports are an outsized contributor to growth and employment.
Without mentioning Trump by name, Lagarde said that the possibility of trade conflicts was one factor that meant economic growth could turn out worse than expected. “The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy,” she said.
There are risks at home in Europe as well. French Prime Minister Michel Barnier resigned on December 5 after losing a vote of confidence, leaving France without a functioning government and no clear majority in parliament able or willing to tackle the country’s excessive budget deficit. Elections cannot be held before June. While the end of the Barnier government hasn’t triggered a financial crisis, it adds uncertainty about how long it will take for France to right its finances.
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On top of that, Germany’s governing coalition broke up in November, and a new national election is expected on February 23. Weeks of coalition negotiations are expected to follow before a new government is in place. So the two biggest eurozone economies will be politically adrift for months.
All that has dinged the confidence that businesses need to borrow, invest, expand production and take risks. The survey index of purchasing managers compiled by S&P Global came in at 48.3 in November, with levels below 50 suggesting the economy is slowing. The Sentix survey of investor confidence fell in its first update after the US election, by 4.6 points to minus 17.5.
A drumbeat of announcements regarding job cuts in coming years at major firms in Germany has not improved the mood. They include auto technology and parts firm Bosch, which plans to drop 5,500 jobs, 3,800 of them in Germany; auto supplier ZF Friedrichshafen, which plans to drop 14,000-15,000 jobs; and Ford Motor Co., which is to drop 4,000 jobs in Europe, 2,900 in Germany, and steelmaker ThyssenKrupp with 11,000 planned cuts. Volkswagen plans to shut as many as three German plants, according to its employee representatives who are negotiating with the company in an effort to block the closings.
The ECB determines interest rate policy for the 20 of 27 EU member countries that have joined the euro currency.
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