ECB cuts rates a quarter point amid concerns of tepid growth, impact of
Trump trade policies
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[December 13, 2024] By
DAVID McHUGH
FRANKFURT, Germany (AP) — The European Central Bank has cut rates by a
quarter percentage point amid signs of weakening growth and concern
about the impact of political chaos in France and the possibility of new
U.S. import tariffs after Donald Trump takes office as president.
The bank’s rate-setting committee made the decision Thursday at its
skyscraper headquarters in Frankfurt to lower the benchmark from 3.25%
to 3%.
Bank President Christine Lagarde said that efforts to drive down
inflation toward the ECB's 2% target were succeeding, making room to cut
rates. “The disinflation process is well on track,” she said in her
post-decision statement delivered at a news conference. Fighting
inflation is the bank's main job.
She said the bank now foresaw “a slower economic recovery” than it did
in a last set of projections in September.
Inflation has fallen steeply to 2.3% from its peak of 10.6% in late
2022, shifting attention from reigning in consumer price increases to
worries about ongoing weak growth. The eurozone is expected to grow 0.8%
this year and 1.3.% next year, according to forecasts from the European
Union’s executive commission.
Higher ECB central bank benchmarks helped bring down inflation by making
it more expensive to borrow and spend, and thus taking pressure off
prices. For the same reason, rates that are kept too high for too long
can undermine growth. The ECB has now cut its benchmark four times from
its record peak of 4%.
Lower rates should support growth amid signs that the post-pandemic
recovery is slowing in the 20 countries that use the euro currency.
Concerns that Trump might impose new tariffs, or import taxes, on goods
imported to the US after he is inaugurated Jan. 20 has sent a cold chill
through the business world in Europe, where exports are an outsized
contributor to growth and employment.
Without mentioning Trump by name, Lagarde said that the possibility of
trade conflicts were one factor that meant economic growth could turn
out worse than expected.
“The risk of greater friction in global trade could weigh on euro area
growth by dampening exports and weakening the global economy,” she said.
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President of the European Central Bank Christine Lagarde arrives for
a press conference at the ECB headquarters in Frankfurt, Germany,
Thursday, Dec. 12, 2024. (Arne Dedert/dpa via AP)
There are risks at home in Europe as well. French Prime Minister Michel
Barnier resigned Dec. 5 after losing a vote of confidence, leaving the
France without a functioning government and no clear majority in
parliament able or willing to tackle the country’s excessive budget
deficit. Elections cannot be held before June. While the end of the
Barnier government hasn't triggered a financial crisis, it adds
uncertainty about how long it will take for France to right its
finances.
On top of that, Germany's governing coalition broke up in November, and
a new national election is expected Feb. 23. Weeks of coalition
negotiations are expected to follow before a new government is in place.
So the two biggest eurozone economies will be politically adrift for
months.
All that has dinged the confidence that businesses need to borrow,
invest, expand production and take risks. The survey index of purchasing
managers compiled by S&P Global came in at 48.3 in November, with levels
below 50 suggesting the economy is slowing. The Sentix survey of
investor confidence fell in its first update after the U.S. election, by
4.6 points to minus 17.5.
A drumbeat of announcements regarding job cuts in coming years at major
firms in Germany has not improved the mood. They include auto technology
and parts firm Bosch, which plans to drop 5,500 jobs, 3,800 of them in
Germany; auto supplier ZF Friedrichshafen, which plans to drop
14,000-15,000 jobs; and Ford Motor Co., which is to drop 4,000 jobs in
Europe, 2,900 in Germany, and steelmaker ThyssenKrupp with 11,000
planned cuts. Volkswagen plans to shut as many as three German plants,
according to its employee representatives who are negotiating with the
company in an effort to block the closings.
The ECB determines interest rate policy for the 20 of 27 EU member
countries that have joined the euro currency.
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