ECB lowers key interest rates amid evolving economic landscape

The European Central Bank (ECB) has announced a decision to lower its three key interest rates by 25 basis points. This move, explained by ECB President Christine Lagarde and Vice-President Luis de Guindos at a press conference in Frankfurt am Main, is driven by an updated assessment of the inflation outlook and the dynamics of underlying inflation.

"The disinflation process is well on track," stated Lagarde. Inflation is projected to align with the ECB's two percent medium-term target within the year. Although domestic inflation remains high due to wage and price adjustments lagging behind previous surges, wage growth is reportedly moderating.

Interest rate cuts are gradually making borrowing more affordable for firms and households, though financing conditions remain tight due to restrictive monetary policy. The economy faces headwinds, but rising real incomes and diminishing effects of past policies are expected to support demand growth over time.

Lagarde emphasized the ECB's commitment to stabilizing inflation at the two percent target: "We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance." Decisions will be informed by economic data, underlying inflation dynamics, and monetary policy transmission strength.

The Eurozone economy stagnated in Q4 according to Eurostat's preliminary estimate, with manufacturing contracting while services expand. Consumer confidence remains fragile despite rising real incomes. However, conditions for recovery persist due to a robust labor market and higher incomes that should boost consumer confidence.

Fiscal and structural policies are encouraged to enhance productivity and competitiveness in Europe. The European Commission’s Competitiveness Compass provides a roadmap for action. Governments are urged to fulfill commitments under the EU’s economic governance framework without delay.

Annual inflation rose slightly in December due primarily to past energy price drops falling out of calculations. Food price inflation decreased while services inflation increased slightly. Indicators suggest inflation will stabilize around the two percent target as labor cost pressures ease.

Risks to economic growth remain skewed downwards due to potential global trade frictions and geopolitical tensions affecting exports and energy supplies. Conversely, easing financing conditions could accelerate domestic consumption recovery if realized faster than anticipated.

Market interest rates have risen since December, reflecting global financial market trends. However, borrowing costs for firms and households are decreasing thanks to recent interest rate cuts.

In November, new firm loan interest rates fell to 4.5%, while mortgage rates decreased slightly. Growth in bank lending increased marginally in December amid tightening credit standards due mainly to banks' heightened risk concerns regarding customers.

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