The European Central Bank is Poised for Another Rate Cut Amid Economic Uncertainty

The European Central Bank (ECB) is anticipated to implement another interest rate cut this week, marking its third consecutive reduction as it seeks to stimulate lending and revitalize consumer spending and business investment across the 20 eurozone countries.

Having aggressively raised rates starting in mid-2022 to combat soaring energy and food prices, the ECB has shifted its strategy to rate cuts amid easing inflation and a weakening eurozone economy.

Recent data showing worse-than-expected economic performance had fueled speculation that the ECB might opt for a more significant half-percentage-point cut during its upcoming meeting on Thursday. However, with inflationary pressures persisting—evidenced by a rebound above the ECB’s 2% target in November—most analysts predict the central bank will maintain its current pace of a quarter-point reduction.

Capital Economics, in its analysis, noted that while a strong argument exists for a faster easing of policy through a half-point cut, the majority of the ECB governing council appears to favor a more cautious quarter-point approach.

This forthcoming adjustment will mark the fourth rate cut by the Frankfurt-based institution since June, bringing the key deposit rate to 3%. ECB officials have increasingly expressed concerns over the eurozone’s weakening growth prospects, signaling a shift from their previous inflation-centric policy stance.

Inflation in the eurozone peaked at 10.6% in late 2022, driven by Russia’s invasion of Ukraine and post-pandemic supply chain disruptions. Although it fell below the ECB’s 2% target in September 2024, inflation has since climbed back, reaching 2.3% in November.

Addressing the European Parliament last week, ECB President Christine Lagarde acknowledged that recent data indicated a weaker short-term growth outlook. She attributed this to a slowdown in the services sector and a continued contraction in manufacturing, further emphasizing the challenging environment the eurozone faces.

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