Central Bank reduces lending rate for the eighth time since summer 2024, leaving analysts questioning if relief measures are at a standstill.
Gearing Up for a Hold: ECB's Considering Pause Amidst Global Uncertainties
In the heart of Europe, the hangover from years of monetary easing seems to be taking its toll. After slashing interest rates a whopping eight times in a row since 2024, the mighty European Central Bank (ECB) is considering a brief pause in its relentless quest for economic stimulus.
First up, the ECB decided to trim the deposit rate, vital for banks and savers alike, by 0.25 percentage points to 2.0 percent. This move means the central bank has slashed the deposit rate in half since the onset of its rate-cutting spree in June 2024. As a result, companies might find it cheaper to borrow money for fresh investments, potentially jump-starting the economy. Unfortunately, this means savers will have to endure even shorter straws as their savings accounts and time deposits yield less interest.
"Well positioned," declared ECB President Christine Lagarde regarding the current interest rate level. Despite reaching the end of its rate-cutting cycle, the central bank is still grappling with uncertainties, such as the lingering trade tussle between the European Union and the US.
"Running Out of Moves"
According to economists, the ECB may take only one or two more steps before hitting the wall. "We are slowly reaching the end of the interest rate ladder," says Ulrich Kater from DekaBank. Once the central bank reaches this new equilibrium, further stimulus through low interest rates might not be appropriate given the economy's structural issues, asserts Florian Heider of the Frankfurt-based Leibniz Institute for Financial Market Research SAFE.
The ECB had been expected to lower interest rates at its June meeting due to the sharp decline in eurozone inflation. In May, the inflation rate dipped to 1.9 percent, below the ECB's target of 2.0 percent, according to Eurostat's first estimate.
While the trade dispute with the US is a double-edged sword, dragging down consumer and business confidence, it is also fueling growth in the long term through increased public spending on defense and infrastructure. Additionally, rising wages could boost consumer spending, and cheaper financing for companies might accelerate investment.
A Delicate Balance: Inflation and Growth
The ECB expects inflation to drop faster than previously predicted. For 2025, the central bank now projects an inflation rate of 2.0 percent, a downward revision from its earlier assumption of 2.3 percent in March. In 2026, inflation is expected to fall short of the target rate of 2.0 percent.
Inflation, a double-edged sword, erodes purchasing power as people can buy less for a euro. Maintaining inflation at a moderate level helps ensure that neither companies nor consumers delay investments, keeping the economy moving forward. However, aggressive rate cuts risk igniting inflation, as Heiner Herkenhoff, CEO of the German Banking Association (BdB), warns.
Amidst these uncertainties, Lagarde recently squashed rumors of her premature departure from the ECB. The Frenchwoman is committed to serving her full term, which ends in October 2027.
In light of the economic and social policy uncertainties, the European Central Bank (ECB) might be running out of moves to further adjust finance policies, considering a brief pause after trimming the deposit rate. Businesses might find cheaper loans for investments, although this could result in lower yields for savers.
