European Central Bank cuts interest rates to support growth as eurozone economy stagnates – business live | Business


European Central Bank cuts interest rates by 0.25 percentage points

The European Central Bank has cut its key interest rate by 0.25 percentage points to 2.75% in an effort to stimulate growth in the struggling eurozone economy.

The rate-setting governing council has now cut interest rates five times since the start of summer 2024.

The cut was widely expected by financial market traders and economists as the ECB responds to weak growth in the eurozone’s key economies. Eurozone GDP did not grow in the last three months of 2024, according to a preliminary reading published on Thursday.

The bank’s president, Christine Lagarde, will give more details of the reasons behind the rate cut at a press conference at 1:45pm GMT.

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Key events

Back to that US GDP reading, at a 2.3% annualised rate for the fourth quarter it was the weakest end to a year since 2018.

Samuel Tombs, chief US economist at Pantheon Macroeconomics, said that the world’s largest economy was held up by the consumer, but that may not last. He wrote:

Economic growth became increasingly reliant on households last year, with the 4.2% surge in consumers’ spending in Q4 driving essentially all of the overall increase in GDP, offsetting a big drag from inventories and weakness in investment.

However, we would caution against concluding that underlying domestic demand remains unassailably strong. We think that a substantial share of the gain in consumption in Q4 reflected households pulling forward purchases in anticipation of tariffs threatened by the new administration.

“Consumer spending remained resilient, while investment was weaker,” said Richard Flax, chief investment officer at Moneyfarm, an online wealth manager.

Despite [the weakening growth], the US economy has managed to avoid the long-feared recession following the Covid-19 pandemic. Investors are now trying to determine if the Federal Reserve will begin cutting interest rates again in 2025, after maintaining them on Wednesday. In a press conference, Powell stated that the economy “remains strong” while inflation “remains somewhat elevated.”

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The last questions focus on real incomes and Bulgaria’s economic convergence with the EU.

Lagarde says that there has been a catch-up in real incomes compared with pre-pandemic levels. She says that she hopes that consumers will spend more (rather than saving) despite “a degree of uncertainty about European political developments”.

The convergence between Bulgaria and the rest of the EU is going well, she says.

And with that the press conference is over.

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The next questions covered her discussions with European Commission president Ursula von der Leyen and the relationship with the US Federal Reserve after it withdrew from a green policy forum.

Von der Leyen gave a presentation about the Commission’s policies on restoring competitiveness and innovation, but also to hear from ECB governors, Lagarde says.

On the Fed, she says that there is “huge value” in the Network for Greening the Financial System, from which the US central bank withdrew. It has “great value” for policymakers, she said.

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The next question goes back to the neutral rate debate.

Christine Lagarde says the debate about what the neutral rate is is “entirely premature” because European monetary policy is still restrictive.

She says that it’s not possible to say whether the bank would lower rates below the notional netural rate to stimulate growth. She says:

I cannot tell you that!

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Lagarde is asked if the eurozone economic recovery is delayed.

First of all, there is recovery, she says. The economy is not at potential yet, but it is certainly a recovery, she says. The ECB has good reason to believe that consumption will pick up, and the weak fourth quarter in the eurozone does not reflect the whole year of 2024.

Recovery there is; stagflation there is not.

Asked about recent bond yield increases that have troubled governments around the world (including the UK), she says that most of that is “largely spillovers” from the US as investors adjusted to Trump’s inflationary policies.

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Bitcoin will not be added to reserves of European central banks, says Lagarde

Lagarde is asked her confidence on the inflation target, and about a strategic bitcoin reserve.

On bitcoin, she says the cryptocurrency will not be added to the reserves of the central banks that make up the European Central Bank.

She says that bitcoin is plagued by the suspicion of money laundering and other criminal activity. She says:

I am confident that bitcoins will not enter the reserves of any of the central banks of the members of the general council.

On the inflation target, there is one item that is still resisting the disinflation (fall in inflation) seen everywhere else – services inflation – Lagarde says. We look carefully at services, she says. All the indicators on wages are heading down at the moment. She said:

We are not celebrating that, but we are taking note.

The ECB has confidence that wages are on their way down and will impact on the price of services, she says.

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Lagarde is asked whether it is realistic to believe that exports will contribute to economic growth in light of Trump’s tariffs, and why the ECB didn’t discuss a bigger cut of 50 basis points.

Lagarde says:

We did not even utter the two numbers five-zero. 50 was not in the discussion at all.

On exports, she says they analyse uncertainty around trade as a potential risk, but they don’t have enough certainty on Trump’s trade policy to be confident.

There are rumours, there are statements, there are assumptions, but we don’t have any clear, tangible numbers.

By March, “we will still be plagued by uncertainty” on trade, Lagarde says.

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On to the questions. Lagarde is asked about the future direction of interest rates and the neutral rate (at which policy is perceived as neither inflationary nor disinflationary).

All governors supported the ECB’s position in a unanimous vote.

She says the ECB is still in “restrictive” territory.

We know the direction of travel, Lagarde says, but emphasises that the pace will depend on data that comes in after that.

And on the neutral interest rate, Lagarde says that the ECB will publish details of changes to the estimated rate.

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Greater friction in global trade could weigh on growth, Christine Lagarde said.

Global economic risks “remain tilted to the downside”, she said. Heightened geopolitical tensions could increase inflation if it pushes up logistical costs.

However, she did not come down either way on whether Trump’s proposed tariffs will add to eurozone inflation. She said:

Greater friction in global trade would make the inflation outlook in the euro area more uncertain.

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Inflation is expected to fluctuate around its current level in the near term, Lagarde said.

Recent signals point to moderating wage pressures. Most measures of longer-term inflation expectations remain around 2%.

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Christine Lagarde: Europe’s economy ‘set to remain weak in the near term’

European Central Bank president Christine Lagarde has said that the “economy stagnated” and “It is set to remain weak in the near term”.

Manufacturing is contracting, while “consumer confidence is fragile”, she said. However, she said that cheaper credit will increase spending. She said:

Nevertheless, the conditions for a recovery remain in place.

However, she added an early warning that US tariffs could be a problem, saying exports will help “provided trade tensions do not escalate”.

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European Central Bank president Christine Lagarde has started a press conference on the decision to cut interest rates.

She is speaking at a press conference in Frankfurt after the European Central Bank’s announcement. We will bring more details as they come.

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Melanie Debono, senior Europe economist at Pantheon Macroeconomics, another consultancy, has done a bit of central bank rune-reading.

Her verdict is that the ECB is sticking to the same path outlined in December. She wrote:

The key line in the decision statement is unchanged, which means that it still includes little in the way of forward guidance, instead pledging data-dependency. It again states that “The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.”

Recall that the text was edited in December to remove the reference to the need for a “sufficiently restrictive” policy rate. These words were removed to pave the way for further easing. We continue to look for the ECB to trim rates twice more in the current easing cycle, specifically by 25 basis points in March and in June, such that the deposit rate reaches a terminal rate of 2.25%.

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Back to the European Central Bank, Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, a consultancy, said the rate cut was “no surprise”.

The accompanying statement implies that more cuts are coming, as is widely anticipated. We think the bank will have to lower interest rates further than most investors expect.

The statement is very similar to last month’s. It describes domestic inflation as “high” but notes that this is mostly due to the lagging components of inflation. The overall tone shows that policymakers are confident that inflation will soon return sustainably to the target.

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US economy slowed more than expected at end of 2024

The US economy expanded slower than economists had expected in the last three months of the year, according to new government figures.

US GDP grew by 2.3% on an annualised basis in the final three months of the year, according to the Bureau of Economic Analysis. That was slower than the 2.6% annualised growth expected by economists polled by Reuters.

It was also slower than the previous quarter, when growth was 3.1% annualised.

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The euro has remained steady in the minutes after the European Central Bank made an announcement firmly in line with market expectations.

The euro is down by 0.1% today against the US dollar, with only a marginal uptick since the announcement was published.

The euro gained slightly against the US dollar after the ECB announcement, in this chart showing Thursday’s trading session, but remained within the range set in earlier trading. Photograph: Refinitiv

European bond yields have remained steady as well. Reuters reported:

The German 10-year bond yield, the benchmark for the euro area, was last down six basis points [0.06 percentage points] on the day at 2.51%, having dropped earlier after weak growth data.

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