ECB Plans Gradual Interest Rate Cuts Amid Faster Inflation Deceleration

The European Central Bank (ECB) is preparing for a series of gradual interest rate reductions throughout 2025, aiming to bring the current rate of 3% down to 2%. This central scenario, outlined by sources familiar with discussions in Frankfurt, envisions four equal cuts of 0.25 percentage points, beginning with the January meeting and continuing at subsequent gatherings.

The ECB’s plan is underpinned by two key factors: inflation decelerating faster than previously forecasted and a noticeable slowdown in the European economy. According to data available to the ECB, inflation is currently slowing at a rate of 0.2% faster than initial projections, bringing the anticipated achievement of the 2% inflation target closer than earlier estimates. This has provided the “green light” for adjustments to monetary policy, which are expected to ease economic pressure and provide relief to borrowers across the eurozone.

However, on the economic front, the outlook remains concerning. Indicators suggest an ongoing slowdown in eurozone activity, with particular challenges in Germany and France. Germany, the bloc’s largest economy, continues to experience growth rates hovering just above zero, while France is grappling with both low growth rates and rising public debt. Against this backdrop, the ECB believes that reduced interest rates and more affordable borrowing could help counteract recessionary pressures and foster positive developments in these critical economies, which significantly impact the entire eurozone.

Notably absent from the ECB’s current scenario are potential negative repercussions stemming from the policy announcements of U.S. President-elect Donald Trump, particularly regarding his stated intention to impose tariffs on European goods. If such measures are implemented after the January 20 inauguration, the ECB is prepared to act decisively to mitigate risks. “The ECB will take action with all the weapons it has in its quiver to prevent risks,” assured European sources, referencing the bank’s proactive responses during both the debt crisis of the previous decade and the COVID-19 pandemic, which included the provision of cheap money to bolster liquidity and stabilize the European economy.

For now, the ECB and eurozone governments are adopting a cautious approach, closely monitoring the situation in the U.S. while proceeding with their outlined monetary policy strategy. These planned rate reductions are expected to serve as a critical antidote to the eurozone’s economic challenges while maintaining the ECB’s commitment to inflation control and economic stability.

By fLEXI tEAM