The European Central Bank (ECB) has once again turned the interest rate screw and lowered the key interest rate by 0.25 percentage points, now standing at 2.75 percent. This decision follows a series of interest rate cuts since summer 2024, aimed at supporting the economy in the euro area. However, economic prospects remain uncertain.
Christine Lagarde sits between a rock and a hard place: Inflation is still not fully under control at 2.4 percent, while the euro area’s economy is faltering. The interest rate cut is meant to kick-start the engine, but it also carries risks – a high-wire act without a net.
A main argument for the step is the decreasing labor market pressure. In particular, rising wages in the service sectors have kept inflation high. The ECB now assumes that this effect will subside and inflation will continue to decline.
Not all experts share the ECB’s optimism. Commerzbank analysts warn that structural factors like deglobalization, demographic change and climate policy could keep price pressure high in the long run. Moreover, trade conflicts with the US could lead to rising import prices.
The interest rate cut could also have an impact on the euro. Already in recent months, the common currency has lost value against the US dollar. If this trend continues, prices for imported goods could rise, which could in turn fuel inflation.
On the financial markets, speculation is rife that the ECB could lower interest rates to 2.25 percent by mid-year and to 2 percent by October, a significant easing of monetary policy.
However, expectations differ between Europe and the US. The US Federal Reserve is likely to make fewer interest rate cuts, as the US economy is growing stronger and inflation is more persistent there. This could lead to capital flowing out of Europe and into the US, further weakening the euro.
The ECB is thus faced with a difficult dilemma. On the one hand, the European economy desperately needs support, while on the other hand, too many interest rate cuts could create new problems. The coming months will show whether the current course of the central bank will bring the desired success or create new challenges.