European Central Bank delivers expected 25-basis-point interest rate cut

The European Central Bank announced a 25-basis-point interest rate cut on Thursday, its fifth one since the central bank began easing monetary policy in June last year.

The reduction brings the ECB’s deposit facility, its key rate, to 2.75%. Markets had been pricing in an over 90% chance of a 25-basis-point cut ahead of the announcement.

The ECB is grappling with balancing a re-acceleration of euro area inflation in recent months with sluggish economic growth in the region. Headline euro are inflation rose for the third consecutive month to 2.4% in December, after falling below the ECB’s 2% target several months earlier. A renewed pick-up in inflation was expected, as base effects from lower energy prices fade.

Preliminary data released Thursday showed that the euro zone economy flatlined in the fourth quarter of 2024. Economists polled by Reuters had expected growth of 0.1% over the period, following a 0.4% expansion in the three months to the end of September.

Markets will be closely following ECB President Christine Lagarde’s post-announcement press conference amid uncertainty surrounding newly inaugurated U.S. President Donald Trump’s policies.

Investors are keen to gauge how comfortable the ECB is with diverging from the U.S. Federal Reserve in terms of monetary policy and prospective relaxation. The Fed on Wednesday left interest rates unchanged, in line with expectations. Markets are overall pricing in fewer interest rate cuts from the Fed than from the ECB this year.