ECB Cuts Rates Again and Keeps Door Open to Further Cuts

• Worried over this increasingly dark outlook, and what ECB President Christine Lagarde described as "uncertainty ... in abundance", a handful of policymakers even pushed for a bigger half-percentage-point rate cut to buffer the euro zone economy. However, they settled unanimously on 25 basis points, Lagarde said, taking the ECB's deposit rate, the benchmark for borrowing costs across the 20-nation currency bloc, to 3%.
• The central bank also removed an earlier reference in its guidance to keep interest rates sufficiently restrictive, which economists took as a sign that further policy easing is coming - perhaps as soon as January, as inflation is seen settling at the ECB's 2% target in early 2025. Lagarde also warned that domestic inflation remained uncomfortably high, and that victory over excessive price growth was not yet complete.
• Investors even see a 30.0% probability that the January cut will be 50 basis points, or that the rate-cutting streak will last beyond June, taking the deposit rate to 1.75% by end-2025. The changed guidance is also a clear hint that rates could fall at least to the so-called neutral level - hard to define but probably between 2% and 2.5% - which neither stimulates nor slows growth.
• Even if Lagarde was vague about further rate cuts, she went out of her way to emphasize downside risks to growth, including from prospective trade tensions with the United States under incoming U.S. President Donald Trump. These fears fed at least partly into the ECB's economic projections, which predicted even slower growth than already expected and recovery both shallow and delayed.
• Policymakers backing a 50-basis point move argued that economic growth could fall below 1% next year if punitive tariffs are imposed as Trump has threatened. With Germany facing an early election and France struggling to find a stable government, downside risks prevail.

(Source: Reuters)