European Central Bank (ECB) President Christine Lagarde has indicated that interest rate cuts will continue if inflation eases further towards the 2% target, as restrictive monetary policy is no longer necessary to curb economic growth.
Lagarde emphasized, “If incoming data continue to confirm our baseline, the direction of travel is clear, and we expect to lower interest rates further.”
The ECB has already cut rates four times this year, reducing the deposit rate to 3%. Investors are betting on additional cuts in 2025, with markets pricing reductions at each of the next four ECB meetings. Analysts predict rates could fall to the neutral range of 1.75%-2.5%, a level that neither restricts nor stimulates the economy.
Lagarde highlighted that inflationary pressures, particularly in the services sector, have significantly eased. Recent data show a steep drop in services inflation, while wage growth is cooling, with projections for 2025 at 3% - a pace aligned with the ECB’s inflation target.
Despite moderating inflation, eurozone economic growth remains weak, with sluggish consumer spending and persistent geopolitical risks threatening recovery. Lagarde noted that consumer caution has been “striking,” with households saving a large portion of their income.
Geopolitical uncertainties, including potential U.S. tariffs under President-elect Donald Trump, pose additional risks. “If the United States—our largest export market—takes a protectionist turn, growth in the euro area is likely to take a hit,” Lagarde warned.