ECB cuts rates again, keeps door open to further cuts

The European Central Bank cut interest rates for the fourth time this year today, by quarter of a percentage point, and kept the door open to more as growth is hit by political instability at home and the threat of a fresh US trade war.

The ECB has been easing policy as inflation worries largely evaporate and the debate shifts to whether it is cutting rates fast enough to support an economy that is lagging global peers.

Predicting that inflation will be back at its 2% target in early 2025, and that growth will remain sluggish, the ECB lowered its deposit rate to 3% from 3.25% as expected.

It also changed its guidance, likely to be taken as a hint of further rate cuts.

"The disinflation process is well on track," ECB President Christine Lagarde told a press conference. "In 2025 we shall be at 2%."

The ECB's earlier policy statement had omitted a previous promise to keep policy "sufficiently restrictive", signalling a return to at least a neutral setting that neither stimulates nor slows growth.

But this signal was less forceful than many economists had expected, especially as it came with a warning that domestic inflation remains high.

"The ECB must react and speed up the pace of rate cuts," said Sylvain Broyer, chief EMEA Economist at S&P Global Ratings, adding: "A commitment to cut rates further back-to-back until the deposit rate reaches neutrality is required."

While the "neutral rate" is hard to define, most policymakers put it between 2% and 2.5%, suggesting that several more rate cuts are coming before the ECB gets there.

Lagarde acknowledged "there were some discussions" about cutting by 50 basis points but said the consensus had been for a 25-basis-point move.

Although economists were almost unanimous in predicting today's move, many had acknowledged that a bigger cut would also be justified given the deteriorating growth outlook and rapidly retreating inflation.

These were precisely the reasons why the Swiss National Bank cut its own key rate by a bigger-than-predicted 50 basis points earlier in the day, taking the benchmark rate to just 0.5%.

The SNB said geopolitical tensions, including US trade policy, could result in weaker growth while Europe was also facing political uncertainty.

While no ECB policymaker explicitly argued for a 50 basis cut in the run up to the meeting, several had pointed out that risks for lower growth and inflation were mounting.

These fears fed into the ECB's economic projections, which predicted that growth will be even lower than already muted expectations and a recovery would be both shallow and delayed.

With Germany facing an early election, France struggling to find a stable government and incoming US President Donald Trump threatening punitive tariffs, downside risks prevail.

President Lagarde said trade frictions could weigh on growth, while broad geopolitical developments were among the upside risks to inflation.

The ECB today lowered its growth expectations for the medium term and cut its predictions for inflation.

It predicted that the euro zone economy is expected to expand by 0.7% in 2024 rather than the 0.8% predicted in September. In 2025 and 2026, growth is projected to be 1.1% and 1.4% respectively.

The inflation rate was forecast at 2.4% for 2024 and 2.1% in 2025, down 0.1 percentage points in each case.

A cut in rates benefits borrowers but it will result in lower returns for savers.

For a tracker mortgage customer with 15 years left on their loan the reduction will mean a €13 monthly reduction in payments for every €100,000 borrowed.

Average new mortgage rates in Ireland are currently 4.03%, which is the sixth highest in the euro zone according to the Central Bank.

Commenting on today's rate cut, EY Ireland's chief economist Dr Loretta O'Sullivan said the ECB delivered an early Christmas present to borrowers at its final meeting of the year.

"New economic projections from ECB staff show the disinflation process is well advanced in the Euro area and have GDP expanding in 2025," the economist said.

But she added that the growth outlook for the zone is not overly stellar and there is uncertainty related to political developments in France and Germany and global trade tensions pose a risk.

"While President Lagarde didn’t pre-commit to a particular path for interest rates today, EY's expectation is that she and her colleagues will be ringing in the New Year with further cuts," she added.