Markets surge after ECB cuts interest rates for fifth time to 2.75 percent

The European Central Bank (ECB) announced a cut in interest rates to 2.75%, and hinted at a possible further reduction in March. This move comes as concerns about slowing economic growth outweigh worries about persistent inflation. This is the ECB's fifth rate cut since June, and markets anticipate another two or three cuts this year. This expectation is based on the belief that the severe inflation experienced in recent generations is largely under control, and that the weak economy needs support.

ECB President Christine Lagarde stated at a press conference following the rate cut announcement, "We know the direction of travel. As to the speed, the sequence, the magnitude, that will depend on the data that we collect in the coming weeks and months and on the analysis of our staff."

The Eurozone economy stagnated in the last quarter due to an industrial recession and weak consumer spending, and the ECB is expected to continue its easing policy. Meanwhile, the US Federal Reserve chose to hold interest rates steady, suggesting a prolonged pause in adjustments. ECB policymakers may be relieved that the new US President, Donald Trump, has not implemented the broad trade tariffs previously anticipated. However, his threat to impose such tariffs casts a shadow over the economic outlook.

Lagarde said that tariffs would have a "negative impact" on global growth, but that their potential impact on inflation is "more complicated" due to possible retaliation and market adjustments. If a rate cut occurs in March, the ECB's deposit rate would fall to 2.5%, which is at the upper end of what is considered the "neutral range," estimated by ECB staff to neither stimulate nor restrain economic activity.

On one hand, wage growth in the Eurozone's 20 countries is slowing, labor markets are weakening, oil prices have fallen back from their highs at the start of the year, and the sustained strengthening of the dollar seems to have paused for now. On the other hand, inflation remains above the ECB’s target, while slow productivity growth and labor shortages could maintain price pressures, thus limiting the central bank’s room to maneuver. To prepare for this ongoing discussion, Lagarde announced that ECB staff will release new neutral rate estimates on February 7th. Last week, she lowered her own neutral rate range to between 1.75% and 2.25%.

US and European stocks rose on Thursday following the ECB rate cut and the release of strong corporate earnings reports. European markets saw broad gains, and the euro held steady after the ECB’s fifth rate cut since June, boosted by easing inflation and a stagnant Eurozone economy. In New York, the broader S&P 500 and the tech-heavy Nasdaq both rose, while the Dow Jones was relatively flat. The ECB's decision came after the Fed opted to hold US borrowing costs steady, as the US inflation outlook remains elevated despite some easing.

Data showed that the Eurozone economy was flat in the fourth quarter, with slight contractions in France and Germany, and stagnation in Italy, while only Spain showed strong growth among the Eurozone's largest economies. In contrast, the US Commerce Department reported that the US economy grew at an annual rate of 2.3% in the fourth quarter, in line with widespread expectations.

The ECB lowered its rate by a quarter of a percentage point to 2.75%, while the Fed held its benchmark lending rate steady at between 4.25% and 4.50%. While the ECB is poised to continue cutting rates, Fed Chair Jerome Powell said on Wednesday that the US central bank is in “no rush” to adjust borrowing costs again. US President Donald Trump recently urged an "immediate rate cut" and criticized policymakers for not addressing "the inflation problem they created." Powell did not comment on Trump’s criticism of the Fed but mentioned that policymakers would “see” how Trump’s proposed tariffs, tax cuts, regulatory reforms, and immigration policies would affect the economy.