The European Central Bank (ECB) cut rates again as its efforts to drive inflation down across the Eurozone seem to pan out and amidst concerns about sluggish growth, political confusion in France and Germany, and a trade war with the US after the return of Donald Trump to the White House.
The ECB decided to cut a quarter of its rate to 3% from 3.25% and commented positively about the continued drop of inflation, now at 2.3% after reaching a record of 10.6% in 2022. Inflation now stands very close to the ECB’s target of 2%. Bank President Christine Lagarde commented that the “disinflation process is well on track.”
The bank has been doing a cautious balancing act with its benchmarks in order to lower inflation, keeping rates high but not long enough that it would stifle growth. Now that the post-pandemic recovery is slowing down, the ECB is lowering rates in an effort to help the Eurozone. The latest projections have the bloc growing 0.8% in 2024 and 1.3% next year.
However, the central bank is trying to cope with future clouds on the horizons. Lagrande didn’t mention Trump directly, but fears of possible new tariffs on European exports are making the rounds. She said that “the risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy.”
Trump and his protectionist policies are not the only issue. The two biggest economies in the Eurozone are both going through political instability. Germany’s governing coalition collapsed in November and the country is heading towards new elections, but it’s unclear how fast it will have a new operating government.
France is in even direr straits after on December 5, Michel Barnier’s government lost a vote of confidence, leaving the country without a government for the foreseeable future. France can’t hold new parliamentary election until next June and the current political blocs in the parliament are yet to find a solution to the latest political stand-off.
