Fri, Dec 13, 2024 page9

• ECB cuts rates again as eurozone hit by economic, political woes

  • AFP, FRANKFURT, Germany
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  The European Central Bank (ECB) yesterday cut interest rates again, citing a worsening growth outlook and slowing inflation, with political turmoil in the eurozone adding to the troubled picture.

  The central bank for the 20 countries that use the euro reduced its key deposit rate a quarter point to three percent, as widely expected. It was the ECB’s third cut in a row and fourth since June, when it kicked off its current easing cycle.

  After hiking borrowing costs from mid-2022 to combat runaway energy and food costs, policymakers have turned their attention to lowering rates as inflation eases and the eurozone economic outlook darkens.

  

  The headquarters of the European Central Bank (ECB) is pictured in Frankfurt am Main, western Germany, yesterday.

  Photo: Kirill Kudryavtsev, AFP

  Worse-than-expected data, as well as the Swiss central bank making an unexpectedly large rate reduction earlier yesterday, had fuelled speculation the ECB could deliver a hefty, half-percentage-point cut for the first time in the easing cycle.

  But rate-setters opted to continue cutting at the same pace, with a quarter-point reduction, as inflation remains stubborn, having rebounded back above the ECB’s two-percent target last month.

  The slowdown in inflation is "well on track," the ECB said in a statement announcing its decision. It cut its inflation forecasts for this year to 2.4 percent and to 2.1 percent next year — down 0.1 percentage point in each case.

  "Most measures of underlying inflation suggest that inflation will settle at around the governing council’s two-percent medium-term target on a sustained basis," the bank said.

  But the ECB added that it now expects a "slower economic recovery" than several months ago, and cut its growth forecasts slightly for this year and the following two years — to 0.7 percent, 1.1 percent and 1.4 percent respectively.

  The statement dropped previous language on keeping rates "sufficiently restrictive for as long as necessary," saying instead that it was "determined to ensure that inflation stabilizes sustainably" around the ECB target.

  The move by the Swiss National Bank earlier yesterday, which brought its main rate down to 0.5 percent, reflected "uncertainty" about the economic outlook between political upheaval in the US and Europe.

  ECB officials have likewise raised concerns about the weakening growth outlook in the single-currency area, signaling a shift away from being laser-focused on bringing down inflation.

  Eurozone inflation peaked at 10.6 percent in late 2022 after surging in the wake of Russia’s full-scale invasion of Ukraine and amid post-pandemic supply chain woes.

  It fell back under the ECB’s two-percent target in September but rebounded in subsequent months, reaching 2.3 percent last month.

  Political headwinds are adding to the tricky terrain that rate-setters will have to navigate.

  Germany is heading for elections in February, seven months earlier than scheduled, after the collapse of Chancellor Olaf Scholz’s long-troubled coalition last month. Even before the latest turbulence, the eurozone’s biggest economy was struggling with a manufacturing slowdown, and its anemic growth rates are weighing down the broader single currency area.

  Meanwhile in France, the eurozone’s second-biggest economy, the government of Prime Minister Michel Barnier was ousted last week in a historic no-confidence vote, deepening the country’s growing political and financial chaos. Adding to the troubled picture is Donald Trump’s impending return to the White House. He has threatened to slap hefty new tariffs on all imports to the US, and has previously singled out the EU as the bloc runs a sizeable trade surplus with the world’s biggest economy.

  The ECB’s decision comes a week ahead of the US Federal Reserve’s next rate-setting meeting on Tuesday and Wednesday, with markets betting on another cut in borrowing costs.
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