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January ECB meeting: From inflation to growth risks

Market response

January 30, 2025 | 2 min read
Christian Floro, CFA, CMT
Market Strategist
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The European Central Bank (ECB) cut its policy rates today for the fifth time in this cycle, also marking its fourth straight cut. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility were each lowered by 25 basis points to 2.90%, 3.15%, and 2.75%, respectively.

ECB President Christine Lagarde continued to emphasize a data dependent approach to monetary policy, refraining from providing any forward-guidance. Regardless, with upside inflation risks transitioning to downside growth risks—and that’s before even considering the likely impact of U.S. import tariffs—it is abundantly clear that ECB policy rates have further to fall.

Recent developments

The ECB appears confident that the disinflation process is well on track. Services inflation remains relatively sticky, but underlying indicators suggest it should slow over the course of the year. This process should be aided by the transmission of monetary policy conditions, which remain restrictive.

On the other hand, the ECB was less optimistic on economic growth, with both France and Germany’s economies contracting and the broad Euro-area at risk of stagnation. Fragile household and business confidence is weighing on consumption and investment, which is likely exacerbated by the potential escalation of trade tensions. Despite these concerns, however, President Lagarde noted that the ECB did not consider a larger 50bps cut at this meeting. She expressed the view that the robust labor market and rising incomes should help prop up the recovery, and this will be further supported by recent policy rate cuts.

Asked about the potential for tariffs, President Lagarde opted not to speculate on how monetary policy may evolve, instead noting that—given the elevated levels of uncertainty regarding their impact and scope—the ECB staff will only incorporate them into their projections as those policies become more concrete.

Policy outlook

Although the ECB’s decision to cut policy rates by 25bps came as no surprise, its downbeat assessment of economic activity suggests that a 50bps cut should perhaps have been considered. With upside inflation risks diminished, the ECB is likely to focus on addressing stagnating growth risks, particularly in the face of U.S. import tariffs, which have yet to be incorporated into its projections given their uncertainty.

Monetary policy is still restrictive, and it is abundantly clear that ECB policy rates have further to fall. Indeed, with two more inflation reports and an updated set of staff projections on hand, another 25bps cut in their next meeting in March is likely. This increasing divergence between the ECB and the Fed, the latter of which has emphasized increased patience with respect to additional rate cuts, is likely to continue weighing on the euro.

Macro views
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Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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