The ECB proclaims the end of the great interest rate cuts

BrusselsThe President of the European Central Bank (ECB), Christine Lagarde, has proclaimed a change of cycle. It all began after the pandemic and with the start of the Russian invasion of Ukraine: prices soared, and in an attempt to stem inflation, Frankfurt quickly and consistently raised interest rates—which had been stuck at 0% since 2016. Little by little, the rate of price increases has slowed, and the bank has cut the price of money at the same pace. Inflation has now stabilized around the 2% target, and therefore, this Thursday, the bank unanimously decided to keep interest rates at 2% at the ECB's governing council meeting.

This is the second time that the ECB has not cut the price of money after cutting it up to eight consecutive times; and the French leader has hinted that the ECB's governing council plans to maintain it at these levels in upcoming meetings. However, the ECB president assures that the body's future decisions will continue to be based on current macroeconomic data, although she has noted that they will not budge if they remain as they are. And, in fact, the banking institution's economic forecasts predict that inflation will remain stable and that economic growth will even be slightly better than initially expected. "We are in a good moment," Lagarde said at a press conference.

Regarding inflation, the French leader was very optimistic and welcomed the fact that it is expected to remain stable around current levels. "The disinflation process is over," she said at a press conference. According to the ECB's own economic forecasts, price increases will reach 2.1% this year, 1.7% next year, and slightly rebound to 1.9% in 2027. Core inflation, which excludes the most volatile prices of items such as energy and food, will still be above the ECB's target, at 2.4% this year. However, it will already fall to 1.9% next year, and to 1.8% in 2027.

However, experts at the banking institution are significantly revising their eurozone growth forecasts upward. According to their calculations, it will reach 1.2% in 2025, three-tenths of a percentage point higher than they predicted last June. However, the projections for increased economic activity are slightly lower—three-tenths of a percentage point lower—and are now at 1%. As for 2027, the ECB has kept them unchanged at 1.3%.

It's worth remembering that rising money prices are the ECB's main tool to curb inflation, which soared after the pandemic and the start of the war in Ukraine. However, it's a double-edged sword and also causes an economic slowdown. Therefore, the bank always seeks balance and, faced with a stable price increase of around 2% and an economy in better health than expected, has decided to hold its ground.

The eurozone can handle Trump and the French crisis.

Lagarde explained at the press conference of the last ECB Governing Council that they opted not to change rates largely to give themselves room for maneuver if the United States and the European Union failed to reach a trade agreement. Thus, the decision to keep rates at 2% is a sign of confidence in the eurozone economy and its ability to cope with the 15% tariffs that Donald Trump will apply to all European products. In fact, Lagarde asserted that at the beginning of the summer there was "much more uncertainty" than there is now regarding the trade pact signed between the two powers, despite the fact that the geopolitical challenges posed by the wars in Ukraine and Gaza remain.

However, the French leader noted that they expect the effects of the tariffs on economic activity to become more noticeable from now on, but believes they will "fade away" within a year. In any case, the ECB president believes that gross domestic product (GDP) growth will be slightly higher than initially forecast due to large public investments in rearmament and the renovation of major infrastructure, as well as the good health of domestic consumption and the labor market—unemployment remains at historic lows, at 6.2%.

Regarding the political and economic crisis in France, Lagarde has tried to avoid the issue and has limited herself to sending messages of confidence. Thus, the French leader has stated that she trusts French legislators to make decisions that "reduce uncertainty as much as possible," and has once again shown them the path of austerity, as in the old days of the economic crisis. "I am sure that all leaders will operate within the framework of the European Union's fiscal rules," said the ECB president.