ECB cuts interest rates again to stimulate the eurozone

Wikimedia Commons/CC BY-SA 2.0 Author: Kiefer. from Frankfurt, Germany

The European Central Bank cut its key interest rate once again as a stimulus for the eurozone, as growth stagnates due to customers’ worries over inflation and political turmoil in leading European economies like France and Germany.

The ECB governance cut a quarter of the interest rate to 2.75%, the fourth cut in a row. In presenting the decision, ECB president Christine Lagarde felt satisfied with the progress over disinflation and expects overall inflation in the eurozone to fall to 2% by 2025. It was at 2.4% in December, a bit higher than expected due to energy prices.

Lagarde expects the measure to have an impact on economic growth. She said, “The economy is still facing headwinds, but rising real incomes and the gradually fading effects of restrictive monetary policy should support a demand increase over time.”

The cut in the interest rate contrasts with the US Federal Reserve, which decided to stick with its current mark, a sign of the sharp contrast between the US economy and the eurozone—the US growth of 0.6% in the last quarter and 2.3% in 2024.

By contrast, the eurozone is going through a stagnation period, with a 0.7% growth in 2024 across the area. Germany had a second year of declining output, regressing 0.2% in 2024. Forecasts for 2025 are bleak, with a 0.3% growth after slashing the previous forecast of 1.1%.

Germany is facing a complex mix of causes that prompted the slowing down of its economy, dragging everyone in Europe. The political crisis that engulfed Olaf Scholz’s government is also contributing. After months of debates over economic measures, Germany is heading towards a general election on 23 February. The sentiment is that a new government will manage to reanimate the country’s stagnating economy.

Also, France is in dire straits as a political crisis over the formation of a stable government paralysed the country. Snap elections called by French President Emmanuel Macron in the spring didn’t form a coherent majority for a government. Still, they exacerbated the situation, with parties disagreeing on a solution to manage the country’s deficit. A solution is not on the horizon, as new elections can’t be called until next June.

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