Euro Slides on ECB’s Continued Rate Cuts and Tariff Threats

Last Thursday, the European Central Bank cut interest rates by 25 basis points (bps), and the Eurozone economy continued to weaken with persistent inflation pressures. 

ECB President Christine Lagarde emphasized that while inflation has seen a recent uptick, reaching 2.4% in December, the central bank is confident that it will stabilize around its target of 2% over time. The ECB’s approach remains data-dependent, with further rate cuts anticipated as economic conditions evolve. 

ECB Statement 

The ECB maintained a restrictive stance on its monetary policy and is signaling that rate cuts might continue. A 25-bps rate cut in March and April is expected, suggesting that policymakers are moving cautiously towards eased monetary conditions while remaining alert to economic developments. ⁽¹⁾ 

The ECB statement showed that slowing wage growth and corporate profits are helping to reduce inflation pressures, but notes on improved financial conditions were removed. The central bank remains committed to bringing inflation down to 2% and will assess policy changes in each meeting. ⁽²⁾ 

Lagarde’s Comments 

President Lagarde repeated that the timing and scale of future changes will depend on economic data. She also said that the ECB might reach a neutral interest rate which is expected at 2%. 

As rates approach this threshold, discussions on pausing rate cuts within the Governing Council may intensify. Lagarde also downplayed the usefulness of forward guidance, citing significant uncertainty in the economic outlook. The decision to reduce rates by 25 bp was reached unanimously. ⁽³⁾ 

Lagarde’s remarks showed no significant surprises, and financial market reactions remained subdued. The expected 25 bps cut for March is nearly fully priced in, whereas the likelihood of a second cut in April is only partially reflected in market expectations. ⁽⁴⁾ Traders and investors are closely monitoring upcoming data to forecast the ECB’s future policy moves.    

Economic Data 

Recent economic indicators show a mixed mood as the Eurozone combats inflationary pressures and stagnant growth. The recent GDP report showed that the Eurozone economy did not grow in Q4 2024, missing expectations for a slight growth of 0.1%. The main causes of this stagnation include Germany’s 0.2% GDP contraction and France’s decline in growth. ⁽⁵⁾    

Source: Trading Economics 

The chart above shows that the Eurozone’s GDP improved in 2024 but showed zero growth in the fourth quarter. 

Inflation remains a critical concern, with headline inflation rising for the third consecutive month to 2.4% in December, primarily due to base effects. Core inflation is expected to stabilize at 2.7% year-on-year in January 2025, reflecting ongoing price pressures despite the ECB’s recent interest rate cuts to stimulate economic activity. ⁽⁶⁾   

Germany’s unemployment rate ticked higher in January, reflecting ongoing struggles in Europe’s largest economy. 

Further cuts are anticipated as policymakers seek to address weak economic conditions while managing inflation expectations. The upcoming flash inflation data for January, set to be released on February 3, will provide additional insights into the evolving economic landscape in the Eurozone. 

Trump’s Tariffs Take Effect 

Over the weekend, President Trump signed off on his long-anticipated tariff plan, imposing 25% tariffs on imports from Canada and Mexico, and 10% on imports from China. On Sunday night, Trump also stated that tariffs on the EU will “definitely happen.” 

The ECB has expressed concerns over potential U.S. tariffs on eurozone imports, which could significantly impact the region’s economy. Economists estimate that a 10% tariff on all U.S. imports from the Eurozone could reduce the growth rate by up to half a percentage point within a year.  ⁽⁷⁾ 

ECB Chief Economist Philip Lane noted that while such tariffs would likely weaken eurozone economic growth, their effect on inflation remains uncertain.  The ECB monitors these developments closely, emphasizing the importance of maintaining open trade relations to support economic stability. ⁽⁸⁾   

Conclusion 

The European Central Bank remains committed to easing monetary policy amid economic stagnation and inflation concerns, with further rate cuts likely in the coming months. However, external risks such as potential U.S. tariffs and the Federal Reserve’s higher-for-longer stance on interest rates could place additional pressure on the Euro. 

Sources: ⁽¹⁾ ⁽²⁾ ECB Official Website, ⁽³⁾ ⁽⁴⁾ Corporate Nordea, ⁽⁵⁾ ⁽⁶⁾ CNBC, ⁽⁷⁾ ⁽⁸⁾

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