ECB cuts rates amid inflation goals; Trump critiques fed
On Thursday, the European Central Bank decided to lower interest rates by 0.25 percentage points. This action is justified by the expected achievement of the inflation target at 2 percent. After the announcement, the euro exchange rate did not change significantly.
The European Central Bank decided to reduce three main interest rates: the deposit rate will be lowered to 2.75 percent, the refinancing rate to 2.90 percent, and the central bank loan rate to 3.15 percent. The changes will take effect on February 5, 2025.
The ECB Governing Council justifies its decision by the ongoing disinflation process. According to the central bank, core indicators suggest a lasting inflation stabilization around the set target. Despite persistent high domestic inflation, mainly due to delayed wage and price adjustments in some sectors, wage growth is gradually decreasing.
Impact on the economy
The latest interest rate cuts gradually reduce the costs of new loans for companies and households. However, the bank notes that "financing conditions remain restrictive." Previous rate hikes still affect existing loans, particularly those refinancing maturing obligations.
The ECB expects that despite current economic difficulties, rising real incomes and a gradual weakening of the effects of restrictive monetary policy should contribute to increasing demand over time. The bank will continue a data-driven policy without committing to a predefined path for interest rates.
Rates unchanged in the US. Trump's reaction
On Wednesday, a decision on interest rates was made in the US. The Fed did not change them. Former US President Donald Trump immediately called on the Federal Reserve to lower interest rates. In his speech at the World Economic Forum in Davos, Trump emphasized that interest rates should be reduced in the United States and worldwide. His comments were the first public criticism of the Fed since he was president.
Trump repeatedly criticized his appointed Fed Chairman, Jerome Powell. During his first term, Trump had controversial relations with Powell. The former president believes that monetary policy should be more lenient to support economic growth. His statements caused slight increases in the stock market, and the yield on 2-year Treasury bonds slightly fell.
ECB decision in line with forecasts
Experts have commented on the latest ECB decision. The decision is due to weakening economic activity in the eurozone and a gradual stabilization of inflation, which, according to ECB forecasts, is expected to fall below 2 percent in the coming months, write analysts from the investment platform Portu.
As they note, despite elevated core inflation (2.7 percent year-over-year) and rising service prices (+4 percent year-over-year), the central bank acknowledged that the economic growth outlook necessitates further easing monetary policy. - The industrial sector continues to contract, and Germany recorded its second consecutive year of negative GDP growth. Currently, the market anticipates 2-3 more cuts by the end of the year, which could bring the deposit rate to the 2.00-2.25 percent range by December - highlight Portu analysts.
Analysts: Fed must remain independent
Analysts point out that the Federal Reserve's independence is crucial for financial markets' stability. The Fed does not intend to make decisions under political pressure. Currently, interest rates in the US are 4.25-4.5 percent, and the first cut may occur only in June. Experts predict that inflation will gradually decrease, allowing for the easing of monetary policy.
Trump blames the rise in inflation on his successor Joe Biden's policy, pointing to excessive budget spending. The former president believes that the current economic situation results from flawed decisions by the Biden administration. Fed representatives declined to comment on Trump's statements, emphasizing the importance of the central bank's independence.
