European Central Bank Cuts Rates in Response to Real Pressures, Signals with Significant Implications
Recently, the European Central Bank announced a reduction of 25 basis points in its three key interest rates, marking the eighth rate cut since the easing cycle began in June 2024. While this move aligns with market expectations, more importantly, the European Central Bank is signaling that current monetary policy may be nearing a turning point.
European Central Bank President Christine Lagarde stated after the policy meeting, "We are approaching the end of this monetary policy cycle. The current policy path is reasonable, and we are in a relatively favorable position." This statement prompted the market to reassess the likelihood of further rate cuts.
Falling Inflation as the Main Driver
The direct cause of this rate cut is the significant decline in Eurozone inflation. After three years of high levels, inflation shows signs of stabilizing. According to central bank forecasts, the overall inflation rate is expected to drop to 2.0% by 2025 and further ease to 1.6% by 2026, mainly benefiting from falling energy prices and a strengthening euro.
Though some officials believe inflation is near target levels, there is internal market disagreement over its future trajectory. Portugaese Central Bank Governor Mário Centeno warned that inflation could fall below 1% by early 2025, reviving pre-pandemic low inflation risks, while Estonian Central Bank Governor Madis Müller stated that the current inflation situation is stable, alleviating concerns of price spirals or severe downturns.
Weak Economic Growth, Clear Regional Differences
Compared to inflation, the pace of economic recovery in the Eurozone appears more fragile. The latest forecast shows GDP growth of 0.9% in 2025 and 1.1% in 2026. The German economy is expected to stagnate for the third consecutive year, raising concerns about overall recovery. Analysts suggest that some better-than-expected data may result from short-term technical distortions, such as companies concentrating exports to avoid new U.S. tariffs.
However, the European Central Bank emphasized in its statement that medium-term support factors remain, such as government investments in defense and infrastructure, increased real income for residents, and a strong job market, enhancing the Eurozone's capacity to cope with external shocks.
Remaining External Challenges, Policy Needs Flexibility
Currently, the uncertainty impacting the Eurozone's outlook stems mainly from escalating global trade frictions. The U.S. threatens to impose high tariffs on EU goods, hitting business confidence. Lagarde indicated that trade policy uncertainties are currently suppressing investment and export activities. Finland's Central Bank Governor Olli Rehn bluntly stated that the current policy models struggle to predict the chain reactions trade conflicts might ignite.
In this context, the market believes the European Central Bank needs to maintain policy flexibility. Deutsche Bank economist Sebastian Vollmer notes that while this rate cut is cautious, there remains room for easing, particularly amidst weak global demand and persistently low inflation. German think tank economist Stefan Kooths also pointed out that if the economy fails to recover steadily, the Eurozone will face longer-term low inflation risks, with continued easing becoming a necessary option.
Positive Market Reaction, Assets May Benefit
Despite significant challenges, the market has generally reacted positively to the European Central Bank's latest decision. HSBC Asset Management’s Hussain Mehdi believes that the ECB's current position is relatively favorable, with inflation having fallen to pre-Ukraine conflict levels, and with lower oil and gas prices and a stronger euro, asset markets are likely to benefit.
