ECB trims interest rate with eye on political unease

The European Central Bank — the central bank for the 20 countries that use the euro — on Thursday lowered its key deposit rate by a quarter point to 3%.

The widely expected move was the ECB's third cut in a row — the fourth since June when the Frankfurt-based institution kicked off its current cycle of easing rates.

Why is the ECB cuting the rate

After it jacked up borrowing costs from mid-2022 to fight out-of-control energy and food costs because of Russia's war in Ukraine, the ECB policymakers turned their attention to lowering rates.

The reductions have been made more viable as inflation falls, but have also become more desirable to encourage investment as the eurozone's economic outlook darkens.

The had been some speculation that the bank might decide on a hefty half-percentage-point cut for the first time since it started the round of easing.

That had been fueled by worse-than-expected economic data, as well as the Swiss central bank making an unexpectedly large cut earlier on Thursday.

However, the ECB opted to keep cutting at the same pace, a quarter-point, amid fears that price rises might still be a problem. While inflation has dropped, it rebounded back above the ECB's 2% target in November.

Despite this, in a statement announcing their decision, the rate-setters said the slowdown in inflation was "well on track."

The bank cut its inflation forecasts for 2024 to 2.4% and to 2.1% in 2025 — down 0.1 percentage point for each.

"Most measures of underlying inflation suggest that inflation will settle at around the governing council's two-percent medium-term target on a sustained basis," it said.

However, it added that a "slower economic recovery" was expected than several months ago, slightly cutting growth forecasts for 2024 and the subsequent two years to 0.7%, 1.1% and 1.4% respectively.

What does politics have to do with it?

Political chaos has made already-gloomy forecasts worse, with  Germany heading for elections in February — seven months earlier than scheduled after Chancellor Olaf Scholz's long-troubled coalition collapsed last month.

The eurozone's biggest economy had already been struggling with a manufacturing slowdown, its low growth rates pulling down the broader single currency area.

In the eurozone's second-biggest economy, France, the government was ousted last week in a historic no-confidence vote, adding to the country's growing political and financial turmoil.

Meanwhile, there are fears that Donald Trump's impending return to the White House will mean hefty new tariffs on all imports to the United States.

The Swiss decision to reduce by 0.5% was attributed to political upset.

"If there is one thing that we discussed in the last two days it's the level of uncertainty that we are facing," President Christine Lagarde said.

rc/jcg(dpa, AFP)