ECB Continues Rate-Cutting Strategy: A Balancing Act Between Inflation and Growth

The European Central Bank (ECB) has once again lowered the key interest rates, marking the fourth reduction this year. This step comes against the backdrop of political unrest in two of its largest member states, France and Germany. By reducing the deposit rate from 3.25% to 3%, it continues its course of rate cuts, which began in June with a record high of 4%. This rate is crucial for banks in overnight deposits and serves as the ECB's main instrument for monetary policy management. The move was already anticipated by the markets, and forecasts suggest further reductions in 2025. Notably, the ECB has abandoned its previous stance of keeping policy rates "restrictively as long as necessary" — a decision closely monitored by traders. The central bank describes the disinflation process as well underway and emphasizes the Governing Council's determination to stabilize inflation permanently at the medium-term target of 2%. The Council pursues a data-driven approach to determine the appropriate monetary policy stance from meeting to meeting. Particular attention is paid to assessing inflation prospects in light of new economic and financial data, the dynamics of underlying inflation, and the effectiveness of monetary policy. Interestingly, the Council avoids premature commitment to a specific interest rate path. At the same time, the ECB revised its economic forecasts for the euro area downwards. For 2025, it now expects growth of only 1.1% compared to the September forecast of 1.3%. For 2026 and 2027, the ECB forecasts growth of 1.4% and 1.3%, respectively. Joe Nellis, an economic advisor at accounting and consulting firm MHA, commented: "While inflation is still slightly above the ECB's official target of 2%, it's no surprise that the bank decided today to cut the rate to 3%, given that this is already the fourth cut this year.