The European Central Bank (ECB) has reduced its benchmark interest rate by 0.25 percentage points to 2.75%, responding to slowing economic growth and inflation nearing its 2% target. The decision, announced on Thursday during the ECB’s January meeting, was widely expected by analysts, who anticipate up to four more cuts by the end of 2025.
As a result, the deposit facility, main refinancing operations, and marginal lending facility rates will drop to 2.75%, 2.90%, and 3.15%, respectively, effective February 5, 2025. These rates influence borrowing and deposit conditions for banks across the eurozone, impacting financial markets and lending activity.
In an official statement, the ECB reaffirmed its commitment to maintaining inflation stability:
“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”
The rate cut comes amid signs of economic stagnation in the eurozone. According to preliminary data from Eurostat, GDP growth was flat in the final quarter of 2024, a steep decline from the 0.4% growth seen in the previous quarter and below analysts’ forecast of 0.1%. Germany and France, the region’s two largest economies, recorded unexpected contractions, weighing down overall growth.
Germany’s economy shrank by 0.2%, missing projections of a 0.1% decline, while France’s GDP slipped by 0.1%, contrary to expectations of no change. Italy’s economy remained stagnant for the second consecutive quarter, defying hopes of slight growth.
Despite weakness in the core economies, some peripheral nations saw stronger performances. Portugal led growth with a 1.5% quarterly increase, followed by Lithuania (+0.9%) and Spain (+0.8%). Meanwhile, Ireland recorded the steepest contraction at -1.3%.
With economic momentum faltering, markets had widely anticipated the ECB’s decision to ease monetary policy in an effort to support growth while keeping inflation in check.
