“The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time,” said Christine Lagarde, president of the European Central Bank, on 30 January 2025, as she announced a 25 basis point cut to the key banking rates in the euro area. Archive photo: European Central Bank (2024)

“The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time,” said Christine Lagarde, president of the European Central Bank, on 30 January 2025, as she announced a 25 basis point cut to the key banking rates in the euro area. Archive photo: European Central Bank (2024)

With inflation still above 2%, the European Central Bank has implemented another 25bps rate cut, gradually easing borrowing costs for businesses and households while maintaining a cautious policy stance.

The European Central Bank (ECB) has cut euro area interest rates by 25 basis points for the fifth consecutive time, bringing the total reduction since June 2024 to 125bps. The latest decision, on 30 January 2025, comes despite a slight rise in inflation, with both core and services inflation remaining above the ECB’s 2% target.

In effect, the deposit facility, main refinancing operations and marginal lending facility rates will be lowered to 2.75%, 2.90% and 3.15% respectively from 5 February 2025. ECB president Christine Lagarde stated that the cut reflects the policy-setting governing council’s revised inflation outlook and ongoing economic conditions. The decision was widely by economists and signals the ECB’s commitment to balancing inflation control with economic growth.

A day earlier, on 29 January, the US Federal Reserve opted to hold rates steady at 4.25%-4.50%, citing a strong labour market and persistent inflation. The Fed had cut rates by a total of 100bps in the final four months of 2024, widening the gap between US and euro area monetary policy.

Lagarde emphasised that the “disinflation process is well on track,” with inflation evolving broadly in line with projections and expected to return to the 2% target later this year. While domestic inflation remains elevated--largely due to delayed wage and price adjustments--wage growth is moderating, and corporate profits are absorbing some inflationary pressures. 

The ECB’s rate cuts are gradually making borrowing more affordable for businesses and households, noted Lagarde. However, financing conditions remain tight as monetary policy is still restrictive and past rate hikes continue to feed through to existing loans. While economic headwinds persist, rising real incomes and easing policy effects should support a recovery in demand over time.

Looking ahead, Lagarde remains committed to stabilising inflation at the 2% target. Emphasising the ECB’s usual approach, she stated that rate-setting policy decisions will continue to be guided by incoming economic data, inflation trends and monetary policy transmission, with “no pre-commitment to a specific rate path.”

The next governing council meeting in the monetary policy context will take place on 6 March 2025.

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