Monetary policy ECB worries about the economy and cuts interest rates again

The European Central Bank (ECB) is reacting to growing concerns about the economy in the eurozone with its fourth interest rate cut this year. Economists expect the central bank to lower key interest rates even further next year.

This is because trade conflicts with the USA and its re-elected President Donald Trump, for example, could put additional pressure on the weakening economy in Europe.

For the time being, the ECB Governing Council is reducing the deposit rate, which sets the trend on the financial market, by 0.25 percentage points to 3.0 percent. Commercial banks receive this interest rate on money that they park with the central bank. Savers are likely to feel the effects of the further reduction: Many institutions are passing on falling deposit interest rates to their customers in the form of lower overnight and fixed-term deposit interest rates.

The interest rate at which commercial banks can obtain fresh money from the ECB will also be cut again: from 3.4 percent to 3.15 percent. Lower key interest rates tend to be good for the economy: loans become more affordable, companies and private individuals - such as house builders - can obtain financing for investments more cheaply and can thus ensure economic growth.

Experts believe the wave of inflation is over

Economists had expected another rate cut, and there had been some speculation about an even bigger move of 0.5 percentage points downwards. The fact that the major wave of inflation in the eurozone is over opens up scope for the monetary authorities.

The ECB is also concerned about the weak economy in the eurozone. Just recently, President Christine Lagarde warned of continued economic weakness. Europe's heavyweights, France and Germany, are also mired in government crises and are failing as drivers of reform in difficult global times.

It is true that the annual inflation rate in Europe's largest economy, Germany, and in the eurozone as a whole has recently increased again. However, despite a rise to 2.3% in the eurozone in November, experts do not currently expect a wave of inflation like that seen after the start of the Russian war of aggression against Ukraine in February 2022, when energy and food prices soared.

Inflation far from record high

Inflation in the currency area is now a long way off the record high of 10.7 percent in autumn 2022 - partly because the ECB countered this with the sharpest rise in interest rates for 25 years. In July 2022, the years-long zero and negative interest rate policy came to an end and the ECB subsequently raised interest rates ten times.

Higher interest rates make loans more expensive, which can curb demand and counteract high inflation rates. In June 2024, the ECB lowered its key interest rates again for the first time.

The central bank is aiming for an annual inflation rate of 2.0% for the eurozone in the medium term - far enough away from the zero mark.

Permanently low prices are considered a risk for the economy: companies and consumers could postpone investments in the expectation that things will soon become even cheaper. If prices rise too sharply, this is also poison for the economy: consumers then lose purchasing power. This reduces consumption as an important pillar of the economy.

Concerns about the economy and Trump's tariff plans

According to leading central bankers, looming trade conflicts are an additional risk for the already weakening economy in the eurozone. US President-elect Trump has announced high tariffs on imports from Europe. The European Union could respond with countermeasures. The export nation Germany would probably be particularly affected by such a trade conflict.