The European Central Bank cut its key interest rate by another 0.25 percentage points to 2.75% on Thursday amid an uncertain economic outlook and sticky services inflation. The move had had been widely expected. This marks the fourth consecutive rate cut to the eurozone deposit rate, and comes a day after the US Federal Reserve announced it would maintain the federal funds rate unchanged. The decision was unanimous, ECB president Christine Lagarde told reporters at the press conference.
“The disinflation process is well on track. Inflation has continued to develop broadly in line with the staff projections and is set to return to the governing council’s 2% medium-term target in the course of this year,” the ECB said in its statement.
While domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge, wage growth is moderating as expected, the bank said.
ECB Committed to 2% Inflation Target
The governing council reiterated that it will follow a data-dependent and meeting-by-meeting approach and not commit to a particular rate path, but remains determined to ensure inflation stabilizes at its 2% medium-term target.
“Today’s announcement of a 25 basis point cut to rates has come as no surprise, with economists unanimously predicting this in a recent Reuters poll,” said Michael Field, chief European market strategist at Morningstar.
“The cut comes against an uptick in inflation readings over the last few months, but at 2.4% in December, the ECB believes the situation is still under control. We’ve come a long way since the almost double-digit levels of inflation, and while wages are still catching up, the recent bump in services inflation is likely temporary,” Field added.
Markets are currently pricing in a further 75 basis points of rate cuts in 2025, which would bring deposit rates to 2%. On Feb. 7, ECB staff will publish a review of their estimate of the neutral rate - the rate that generates a balanced level of economic growth in the long run.
Changes to the ECB’s Key Interest Rates
The ECB began its rate-cutting cycle in June, paused in July, and resumed its rate changes in September, October and December. As of Feb. 5, the three ECB key interest rates will stand at:
• Deposit facility rate: 2.75%
• Main refinancing rate: 2.90%
• Marginal lending facility: 3.15%
On Wednesday, the Fed hit the pause button and maintained its key rate at its current range of 4.25%-4.50%, marking the first time the Fed has done so since initiating cutting in September. Also Wednesday, the Swedish Riksbank announced a further 0.25 percentage point cut, meaning the rate has been lowered by a total of 1.75 percentage points since May 2024.
The Swiss National Bank led the way among major European central banks with a 0.25 percentage point rate cut in March 2024, while the Bank of England was the last to act. It began its rate cuts at its August meeting, followed by another one in November. Another cut is priced in for the next monetary policy meeting on Feb. 6.
European Economy Stagnates
Earlier on Thursday, Eurostat data showed that the bloc’s economy unexpectedly stagnated in the fourth quarter. “Developments in Germany were particularly disappointing, with the economy there shrinking by 0.2%,” DWS’s chief economist Martin Moryson said in a note.
“According to the Federal Statistical Office, the main reason for this was a significant decline in exports. This is all the more worrying given that German industry will continue to face strong headwinds from the US due to Trump’s trade policy.”
Even though DWS expects high tariffs on European products not to remain in place for long, the uncertainty surrounding further developments is enough to postpone investment decisions.
At 2.75%, the deposit interest rate is still restrictive – too restrictive for the eurozone economy’s current weak state, Carsten Brzeski, global head of macro at ING, wrote on his blog. “The recent surge in bond yields has also worsened financial conditions in the eurozone. Even if some argue that monetary policy can do very little to solve structural issues, political instability and uncertainty in many countries will force the ECB to continue doing the heavy lifting,” he said.
Lagarde reiterated that despite disappointing numbers, the eurozone economy remains on a recovery path, with fading effects of restrictive monetary policy and higher wages eventually supporting demand and lowering borrowing costs.
How Will Rate Cuts Affect Markets?
European stocks and the euro were largely unchanged after the expected policy move, with the euro trading at USD 1.04 and GBP 0.84. With the European Central Bank cutting interest rates faster than the Federal Reserve, this has placed further pressure on the euro, which has fallen sharply since Trump’s election victory.
Equity markets tend to rise on anticipated rate cuts. In bond markets, falling interest rates mean lower yields, which pushes bond prices higher. Lower rates also make existing bonds, and particularly those already issued during a period of high rates, more attractive for yields.
Meanwhile cash savings rates on bank accounts will likely decrease, to the detriment of savers. The rates that savers receive depend mostly on the deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, benefit from lower rates as consumer debt and mortgages become cheaper.
When Are the ECB Meetings in 2025?
- 30/01/2025
- 06/03/2025
- 17/04/2025
- 05/06/2025
- 24/07/2025
- 11/09/2025
- 30/10/2025
- 18/12/2025
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
