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The European Central Bank (ECB) has cut interest rates by a quarter-point, as expected, in an effort to support economic growth and tackle stubborn inflation. After lowering key rates again in December, the benchmark rate on deposit facility has now fallen from 3% to 2.75%, its lowest level since early 2023.
The ECB lowered borrowing costs four times last year, with four moves anticipated in 2025, according to the swaps market.
Although inflation is moving towards its 2% target, some areas of the service sector are lagging and growth remains tepid in a number of countries.
The bank noted that the eurozone “economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time”.
It said: "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. Most measures of underlying inflation suggest that inflation will settle at around the target on a sustained basis.
"Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. But wage growth is moderating as expected, and profits are partially buffering the impact on inflation." All governors supported the ECB’s position in a unanimous vote.
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Earlier on Wednesday a flash reading on the eurozone economy showed that the currency bloc as a whole grew by 0.7% in 2024.
Declining activity in Germany, the eurozone’s largest economy, weighed on the bloc’s growth, with GDP in the country contracting by 0.2% on the quarter. This suggests Germany has now seen annual declines in activity for two consecutive years.
Spain was the only country among the big four with a positive growth rate, up 0.8% in the fourth quarter compared with the previous three-month period.
Christine Lagarde, president of the European Central Bank, said at the press conference in Frankfurt after the announcement that the eurozone “economy stagnated” and “is set to remain weak in the near term”.
"Nevertheless, the conditions for a recovery remain in place," she said, warning that US tariffs could be a problem.
Neil Birrell, chief investment officer at Premier Miton Investors, said: "Eurozone GDP stagnated in the fourth quarter, yet again showing that the economy is in need of some stimulus. It’s a tough outlook globally at present and uncertainty over White House policy measures aren’t helping.