The European Central Bank (ECB) cut interest rates for the fourth time this year on Thursday and kept the door open to further easing ahead as inflation continues to hover close to its goal and the eurozone economy remains weak.
The bank also slightly lowered its growth expectations for the medium term and cut its predictions for inflation.
The central bank for the 20 countries that share the euro reduced the rate it pays on bank deposits, which drives financing conditions in the bloc, to 3.0% from 3.25%. It was at a record 4.0% only in June.
It also signaled that further cuts are possible by removing a reference to keeping rates "sufficiently restrictive" – economic jargon for a level of borrowing costs that curbs economic growth.
"Financing conditions are easing, as the Governing Council’s recent interest rate cuts gradually make new borrowing less expensive for firms and households," the ECB said. "But they continue to be tight because monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit."
There is no universal definition of what constitutes a restrictive rate but economists generally see neutral territory, which neither fuels nor cools growth, at between 2% and 2.5%.
With Thursday's decision, the ECB also cut the rate at which it lends to banks for one week – to 3.15% – and for one day, to 3.40%.
These facilities have barely been used in recent years as the ECB has supplied the banking system with more reserves than it needs via massive bond purchases and long-term loans.
But they may become more relevant in the future as those programs end. The ECB confirmed on Thursday it would stop buying bonds under its Pandemic Emergency Purchase Program this month.
The bank also said that efforts to return inflation to its 2% target were succeeding.
"The disinflation process is well on track," it said in a statement accompanying the decision.
Lower rates should support growth amid signs that the post-pandemic recovery is slowing in the 20 countries that use the euro currency and concerns that U.S. President-elect Donald Trump might impose new tariffs, or import taxes, on goods imported to the U.S. after he is inaugurated on Jan. 20.
That sends a cold chill through the business world in Europe, where exports are an outsized contributor to growth and employment.
Yet there are internal risks as well.
French Prime Minister Michel Barnier resigned on Dec. 5 after losing a vote of confidence, leaving France without a functioning government and no clear majority in parliament able or willing to tackle the country's excessive budget deficit.
Elections cannot be held before June. While the end of the Barnier government hasn't triggered a financial crisis, it adds uncertainty about how long it will take for France to right its finances.
Germany's governing coalition also broke up in November, and a new national election is expected on Feb. 23. Weeks of coalition negotiations are expected to follow before a new government is in place. That leaves the two biggest eurozone economies politically adrift for months.
All that has dinged the confidence that businesses need to borrow, invest, expand production and take risks. The survey index of purchasing managers compiled by S&P Global came in at 48.3 in November, with levels below 50 suggesting the economy is slowing. The Sentix survey of investor confidence fell in its first update after the U.S. election, by 4.6 points to minus 17.5.
The eurozone economy is expected to expand by 0.7% in 2024 rather than the 0.8% predicted in September, the ECB said.
In 2025 and 2026, growth is projected to be 1.1% and 1.4%, respectively.
The inflation rate was forecast at 2.4% for 2024 and 2.1% in 2025, down 0.1 percentage points in each case.
