EUROZONE Rate-Setters to Cut Borrowing Costs Again
The European Central Bank (ECB) is expected to cut its benchmark deposit rate by a further quarter point to 2.75 per cent on Thursday (Jan 30), its fourth reduction in a row.
Background
The ECB hiked interest rates repeatedly from mid-2022 to tame soaring inflation, but is now bringing them back down as price rises slow and the eurozone economy looks weak. There were some concerns after inflation ticked up again – it rose to 2.4 per cent in December, after having fallen below the ECB’s 2 per cent target several months earlier. However, despite the somewhat bumpy path towards their goal, ECB officials remain convinced they are on the right path.
ECB’s Decision
The ECB’s decision will come a day after the Federal Reserve issues its latest call, with markets expecting the US central bank to hold rates steady, while also watching for its views on the outlook under Trump. ING bank analyst Carsten Brzeski said a reduction in borrowing costs at the ECB’s meeting on Thursday "looks like a no-brainer", and officials appeared to be "looking through this temporary acceleration of inflation".
Economic Outlook
Policymakers’ focus has shifted in recent times to the fading economic fortunes of the eurozone, as higher borrowing costs increasingly weigh on households and businesses. At its last meeting in December, the ECB trimmed its eurozone growth forecast for 2024 to just 0.7 per cent, and also cut its estimates for the following two years. Germany, the eurozone’s biggest economy, has been a particular drag on the broader currency bloc, with its output shrinking in 2024 for the second straight year.
Uncertainty
Adding to the uncertain outlook is the return to the White House of Trump, who has threatened sweeping tariffs on all imports into the United States, including from the EU. Trump declared last week that the bloc, which runs a large trade surplus with the United States, treats "us very, very badly. So they are going to be in for tariffs". Any new duties on EU exports to the world’s biggest economy could hit the already stumbling eurozone hard.
Conclusion
The ECB’s decision to cut borrowing costs again this week is expected to be a unanimous one, despite the uncertain outlook. However, the road ahead is less certain, with some economists predicting that the "unity" among ECB governing council members "could be over in the spring".
FAQs
Q: Why is the ECB cutting borrowing costs again?
A: The ECB is cutting borrowing costs again to stimulate the eurozone economy, which is struggling due to higher borrowing costs and fading economic fortunes.
Q: What is the current inflation rate in the eurozone?
A: The current inflation rate in the eurozone is 2.4 per cent, according to December data.
Q: What is the ECB’s target inflation rate?
A: The ECB’s target inflation rate is 2 per cent.
Q: What is the impact of Trump’s protectionist policies on the eurozone?
A: Trump’s protectionist policies could stoke inflation in the United States, which could potentially spill over into the eurozone and elsewhere.
