The European Central Bank (ECB) has decided to cut interest rates by 0.25 points for the fourth time since June, to 3%, given the stagnation of the eurozone in 2025 and the moderation of inflation. The monetary institution seeks to encourage consumers to spend and companies to invest in a context of special uncertainty and weakness in France and Germany, in which Spain is a positive exception.
The ECB has once again improved the “official” financing conditions, which are automatically transferred to the Euribor, and therefore represent a reduction in the cost of mortgages and loans in general, breathing oxygen into economic activity. With this Thursday’s decisionthe institution continues to reverse the monetary austerity that it began to implement in 2022 to, precisely, suffocate demand and thus fight inflation.
The cycle of interest rate hikes began at -0.5% for the reference rate and reached 4% in the fall of 2023, where it remained until the ECB began to back down before the summer of this 2024, given the evidence that price increases had moderated after the shocks of the energy crisis and the bottlenecks in world trade due to the end of the pandemic.
Since then, the concern of the institution’s Governing Council has shifted from inflation, its main mandate, to the stagnation of the economy of the entire eurozone, mainly due to the slowdown of the two main EU economies. This same Thursday, ECB economists updated their inflation and growth projections. Regarding prices, they foresee an average inflation of 2.4% in 2024, 2.1% in 2025 and 1.9% in 2026. That is, close to the theoretical objective of monetary policy.
Regarding economic activity, “Eurosystem experts now foresee a slower economic recovery than in the September projections,” he points out. the report published this Thursday by the ECB. “Although growth rebounded in the third quarter of this year, leading indicators suggest that it has slowed in this quarter,” the same text continues.
The estimates remain at an advance in the combined GDP of the eurozone of 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027, a scenario of weakness and stagnation in the medium term, very negative. “The estimated recovery is based mainly on the increase in real incomes, which should allow households to consume more, and companies to increase investment. Over time, the gradual disappearance of the effects of restrictive monetary policy should support a recovery in domestic demand,” explains the institution.
“There are no surprises regarding the ECB’s decision and statement. Another 0.25 point rate cut, and more to come. Inflation is close to target, the economy and domestic demand are weak, the labor market is suffering in some member states (mainly Germany). Energy prices do not help in the short term, but the institution will not take this into account,” summarizes Daniel Kral, analyst at Oxford Economics.
The “neutral interest rate”, the new reference
With inflation expectations at 2% or below, stagnation in Germany (which accounts for 25% of eurozone activity), uncertainty in France and the threat that Donald Trump’s return to the White House will trigger a global trade war, the new reference for monetary policy is “the neutral interest rate.” That is, the level of the official ‘price’ of money that neither drives nor slows down economic activity. In other words, the level at which interest rates do not harm household demand and the ability of companies to invest.
The problem with this reference is that the ECB has not clarified where exactly that neutral level is, although journalists have tried to extract it from President Christine Lagarde. However, it is the concept that monopolizes the center of the internal debate. What the institution does admit is that “monetary policy is still restrictive” and that previous increases in interest rates continue to be transmitted “to the outstanding balance of the credit granted.” [de los préstamos y las hipotecas]”.
In fact, this Thursday’s ECB report has removed an important message that remained in previous communications: the intention to keep interest rates at “restrictive” levels. But, before journalists, Lagarde has not provided more details, and has returned to the mantras that the decisions “will depend on the data”, that they will be made “meeting by meeting” and that there is no predefined trajectory for the increases. of interest rates,
Instead, to end of novemberGermany’s representative on the Executive Committee of the ECB, Isabel Schnabel, warned that the institution must “be careful about cutting interest rates much further.” The most ‘hawkish’ – the most aggressive, in the jargon of monetary policy – of the institution warned that the ‘price’ of money [el coste de financiarse] In the eurozone it is already close to the level at which it does not slow down economic activity, and lowering it further could be counterproductive in the fight against inflation.
Schnabel estimates that the neutral interest rate, which cannot be measured precisely, is between 2% and 3%, a higher level than that suggested by more moderate governors such as the Greek Yannis Stournaras, the Portuguese Mario Centeno or the Italian Fabio Panetta.
Trump’s threat
The US Federal Reserve (Fed) is also easing financing conditions. Although there is a new threat there, the return of Donald Trump to the White House.
In his previous stage as president of the world’s leading economy, he already ignored the supposed independence of monetary policy and publicly pressured the institution. Additionally, Trump has promised to slap widespread tariffs on American imports and cut taxes on everything from corporate profits to overtime pay. Policies that are inflationary.
From our point of view (that of Spain and the eurozone), the ECB is conditioned by the Federal Reserve because if a large gap opens between the rates of the eurozone and the United States, a depreciation of the euro could occur with respect to the inflationary dollar. (for the eurozone), because imports of oil and other raw materials or products that are traded in dollars would automatically become more expensive due to the effect of the exchange rate.
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