The European Central Bank (ECB) cut interest rates by a further 0.25 percentage points on Thursday while keeping the door open to further rate cuts as Europe’s flagging economy and the risk of a fresh trade war with the US took precedence over inflation worries.
Predicting that inflation will be back at its 2 per cent target later this year, ECB policymakers lowered the central bank’s deposit rate to 2.75 per cent from 3 per cent.
This was the ECB’s fifth rate cut since last July and comes as fresh figures show the euro area economy unexpectedly contracted in the final quarter of 2024.
In contrast to the US Federal Reserve which kept rates unchanged overnight amid uncertainty over the outlook for the US economy, Frankfurt has been busy loosening monetary policy to kickstart the EU’s stagnant economy.
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Growth across the single currency area has effectively flatlined as a manufacturing slump in Germany weighs on output and sentiment is soured by the threat of punitive trade measures from US president Donald Trump.
The ECB’s latest cut, however, is good news for the estimated 127,000 Irish-based tracker mortgage holders, who will see an immediate reduction in their monthly repayments. Those on fixed-rate or variable-rate mortgages will have to wait to see if their banks pass on the cut.
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Markets have factored in an additional 25 basis point cut at the ECB’s next meeting in March, with subsequent policy moves dependent on economic data.
Combined, the ECB rate cuts since July means a typical tracker mortgage holder on 0.5 per cent above the ECB rate with an outstanding mortgage of €180,000 will see a total reduction of €145 per month on repayments arising from the reductions, including the special one-off reduction of 0.35 per cent in September last.
ECB president Christine Lagarde cautioned that the economy was “set to remain weak in the near term”, adding that surveys pointed to a continued contraction in manufacturing even as services grow. “Consumer confidence is fragile,” she said.
She argued that economic risks were “tilted to the downside”, since greater frictions to global trade could weigh on the euro zone economy while lower confidence might be a drag on investment and consumption.
The ECB chief argued that, while it was not easy to know whether tariffs would be inflationary or deflationary, “all we know for sure is it will have a global negative impact”.
The central bank had said that “monetary policy remains restrictive” — an acknowledgment that interest rates are still higher than the neutral rate that neither stimulates nor holds back the economy.
Lagarde said the ECB’s governing council did not even discuss the possibility of a half-point cut this month — an option some economists had hoped for until a few weeks ago.
Rachel McGovern, deputy chief executive at Brokers Ireland, described the rate cut as a “welcome relief” to borrowers. “The unexpected and rapid nature of ten hikes in just over a year coincided with other cost of living increases and was financially stressful for many, especially those paying interest-only and still facing having to repay the full face value of their loans.“
“When you’re on a tight budget every increase adds pressure, not just financially but emotionally, too,” she added. - Additional reporting by The Financial Times
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