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The European Central Bank (ECB) has indicated a potential further reduction in interest rates as the eurozone economy continues to show signs of sluggish growth. Following its June policy meeting, ECB President Christine Lagarde acknowledged that while inflation has eased closer to the bank’s 2% target, underlying economic activity remains fragile. The ECB had already cut rates in early 2025, marking a shift from its previous tightening cycle, but policymakers now suggest that additional monetary easing may be necessary to stimulate demand.
Recent data reveals that eurozone GDP growth stagnated in the first quarter of 2025, with Germany and France, the bloc’s largest economies, posting near-zero expansion. Manufacturing output has contracted for the fifth consecutive month, and service sector growth has slowed significantly. Analysts attribute this weakness to subdued global trade, high energy costs, and cautious consumer spending. The ECB’s latest forecasts project inflation to average 1.8% in 2025, down from earlier estimates, but core inflation—excluding volatile food and energy prices—remains sticky at around 2.3%, raising concerns about persistent price pressures in certain sectors.
Market participants widely expect the ECB to lower its deposit rate by another 25 basis points in September, bringing it to 3.25%. However, divisions within the Governing Council have emerged, with hawkish members cautioning against premature easing, fearing a resurgence of inflation. Lagarde emphasized that future decisions will remain data-dependent, with particular attention paid to wage growth and corporate pricing behavior. The ECB also announced adjustments to its bond portfolio, slowing the pace of quantitative tightening to avoid excessive tightening in financial conditions.
The euro weakened slightly against the dollar following the announcement, reflecting investor expectations of prolonged accommodative policy. Meanwhile, European stock markets rallied, as lower borrowing costs are seen as supportive for corporate earnings. Economists warn, however, that monetary policy alone may not be sufficient to revive growth, urging governments to implement structural reforms and fiscal stimulus where possible. With geopolitical tensions and energy market volatility still posing risks, the ECB faces a delicate balancing act in the months ahead.
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