FRANKFURT, Germany (AP) — Signs of a modest economic upswing in Europe are anticipated to allow the European Central Bank (ECB) to maintain interest rates unchanged for the fourth consecutive meeting during its upcoming session. President Christine Lagarde has conveyed in recent gatherings that the monetary policy is currently "in a good place," with the benchmark deposit rate set at 2%. Analysts predict that Lagarde will reiterate this sentiment at the forthcoming news conference following the central bank's rate-setting council's decision.
The ECB last adjusted its rates during the June meeting, opting for a decrease. Recent surveys from S&P Global regarding purchasing managers indicate a slight dip for December. However, these surveys still reflect an expansion in business activity as the year concludes. Adrian Prettejohn, an economist at Capital Economics, noted that the 20 eurozone countries are expected to observe growth close to 0.3% per quarter compared to the previous quarter.
This growth trajectory is considered a positive outcome, especially in light of the turbulent trade negotiations with the United States that took place over the summer. A resolution was reached whereby a 15% tariff, or import tax, was levied on European goods by U.S. President Donald Trump. While this development poses challenges for European exporters, the deal established with the European Union's executive commission has evidently mitigated uncertainty, enabling businesses to proceed with decision-making processes more confidently.
Economists assert that the region's economy does not require additional support via a rate cut at this juncture. Lorenzo Codogno, an economist, remarked that the haze of economic uncertainty has somewhat lifted—particularly regarding trade matters. This improvement is likely to instill greater confidence within the governing council of the ECB that it is operating in a "good spot," effectively eliminating any lingering bias toward further rate cuts.
Moreover, inflationary pressures remain too elevated for the ECB to consider a rate reduction. The annual inflation rate recorded for November stood at 2.1%, aligning closely with the central bank's target of 2%. This stability can be attributed partly to a decline in fluctuating energy prices. Nevertheless, the services sector experienced a higher inflation rate of 3.5%, which encompasses a range of services from hairdressing and hospitality to concert tickets and healthcare.
Central bank rate cuts are instrumental in supporting economic growth since they significantly impact borrowing rates across the economy. By lowering credit costs, these cuts encourage credit-sensitive expenditures, including purchasing new homes by consumers or investing in new production facilities by businesses. Conversely, increases in interest rates are implemented to rein in inflation by dampening the demand for goods and services.
As the ECB prepares for its upcoming meeting, the combination of modest economic growth, resolved trade tensions, and elevated inflation suggests that it may maintain the current interest rate, symbolizing its cautious yet optimistic outlook for the eurozone's economic stability.
