The European Central Bank (ECB) cut its key interest rate by 0.25% to 3% on Thursday, reflecting progress toward its 2% inflation target. President Christine Lagarde highlighted improving inflation trends but warned of economic slowdown risks due to weak investment and momentum.

Cautious Rate Reduction Marks Policy Shift

This 25 basis point cut is the ECB’s fourth rate reduction since June. Although a 50 basis point cut was debated, the Governing Council settled on a more cautious approach. Lagarde explained that while monetary policy remains restrictive, inflation is converging toward the target.

“We are currently restrictive, but we are getting much closer to our goal,” she said. The ECB also dropped its previous commitment to keeping rates “sufficiently restrictive,” signaling confidence in inflation control.

Inflation Declines, But Economic Growth Slows

New ECB forecasts show inflation averaging 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. Core inflation, which excludes energy and food, is predicted to drop to 1.9% by 2026. Lagarde expressed optimism but noted lingering wage and service sector pressures.

Despite inflation progress, the eurozone economy faces challenges. The ECB downgraded its GDP growth outlook to 0.7% for 2024, 1.1% for 2025, and 1.4% for 2026. Lagarde cited weak investment, manufacturing contraction, and slowing services growth as key concerns.

Future Policy Decisions Depend on Data

Lagarde dismissed speculation about larger rate cuts in January, emphasizing that the ECB will remain data-driven and decide rates on a meeting-by-meeting basis. “We are much closer to our target, but we are not done,” she said, referencing ongoing domestic inflation and wage pressures.

Amid uncertainties like geopolitical tensions, trade disruptions, and fiscal challenges, Lagarde warned that risks to growth remain tilted to the downside. The ECB aims to balance inflation control while supporting the slowing economy.