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President Christine Lagarde has said at recent meetings that
monetary policy remains “in a good place” with the benchmark
deposit rate at 2%. Analysts expect that language or something
similar to be repeated at her news conference after the decision
by the bank's rate-setting council.
The bank last cut rates at its June meeting.
Surveys of purchasing managers by S&P Global slipped slightly
for December but still showed business activity expanding as the
year comes to an end, reinforcing expectations that the 20
countries using the euro currency will continue to see growth of
around 0.3% per quarter over the previous quarter, said Adrian
Prettejohn, Europe economist at Capital Economics.
That outcome is better than feared during turbulent trade
negotiations with the United States over the summer, which
finally settled with a 15% tariff, or import tax, imposed on
European goods by U.S. President Donald Trump.
That is not great for European exporters. But Trump had
threatened higher rates and the deal struck with the European
Union's executive commission appears to have removed uncertainty
and made it easier for businesses to make decisions.
The economy can get by without the added boost from a cut,
analysts say.
“The haze of economic uncertainty has somewhat lifted,
especially regarding trade,” economist Lorenzo Codogno said.
“This will give the governing council greater confidence that it
is in a ‘good spot,’ likely eliminating any remaining easing
bias" toward rate cuts.
On top of that, inflationary pressures remain too high for the
ECB to contemplate a cut.
The headline rate of 2.1% for annual inflation in November is
roughly in line with the bank's goal of 2% thanks in part to a
drop in volatile energy prices. But inflation was higher at 3.5%
in the services sector, which encompasses much of the economy
from hairdressers and hotels to concert tickets and medical
services.
Central bank rate cuts can support growth because they strongly
influence borrowing rates throughout the economy, lowering
credit costs and promoting credit sensitive purchases such as
new homes by consumers or new production facilities by
businesses. Higher rates have the opposite effect and are used
to contain inflation by dampening demand for goods.
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