ECB interest rate decision: Euro area economy needs stronger stimulus

"Today’s expected ECB decision to lower the key interest rate (deposit rate) by a further 25 basis points to 2.5 percent can be seen as a further step towards normalizing monetary policy, after the ECB raised rates sharply to combat high inflation rates in the euro area. However, the ECB would have to do more to help the ailing economy.

The inflation rate in the euro area has stabilized close to the target value of 2 percent since the middle of last year, but has risen again slightly in recent months and averaged 2.5 percent in January 2025. It is unclear to what extent the Trump administration's threatened tariffs on EU products will cause prices in the euro area and thus inflation to rise again.

What is clear, however, is that the economic outlook in the euro area has continued to deteriorate. Adjusted for purchasing power, the euro area economy stagnated last year and Germany, its largest economy, shrank slightly. The ECB already revised its economic growth forecast for 2025 downwards in December. It is to be expected that it will have to revise its forecast downwards again in March in view of the recent sharp increase in geopolitical and trade policy risks. In light of the desolate economic situation, the ECB's monetary policy should switch to expansionary mode and consider further, possibly larger, interest rate cuts.

However, there is still one uncertain factor: the inflation rate. After the inflation shock of recent years and in view of inflation expectations being still elevated, the ECB must place a particularly strong focus on price stability in order to maintain its credibility. Should there be any indication of a turnaround in the inflation trend, it will be up to the governments in the euro area to revive the economy."