ECB cuts interest rates again

The eurozone’s fourth cut of 2024 comes against the backdrop of a potential ‘Perfect Storm’ of political instability and economic woes.

13 December 2024

The European Central Bank (ECB) cut rates by 0.25% yesterday to bring the deposit rate down to 3.0%, marking the fourth rate cut this year for the eurozone’s central bank. However, the narrative is evolving and there is a new-found urgency and purpose to the latest move. Whereas before the story was one of gradual post-pandemic inflationary normalisation which could give space for gradual policy easing, Europe now faces a multi-fronted, full-on growth problem.

ECB President Christine Lagarde has described “uncertainty…in abundance” and this can be seen everywhere. First, there is political instability in the eurozone’s two largest economies. France’s government has collapsed amid a sizeable budget deficit while Germany has a confidence vote on 16 December following the collapse of the ruling coalition which will likely set a path to an early federal election in the New Year. Germany urgently needs to unleash investment into its crumbling economy but cannot do so meaningfully without an amendment to its constitution. For both countries to be in such crisis is unfortunate, since the eurozone desperately needs economic co-ordination to address its numerous challenges and avert recession. These economic challenges include ever-tougher competition in the sectors Europe has traditionally excelled at – chemicals, manufacturing and of course motor vehicles. The car issue is particularly emblematic of Europe’s problems. Having refined and packaged combustion technology to near-perfection over the decades, Germany’s car industry finds itself too flat-footed to rise to the challenge of electrification let alone deal with the flood of low-priced, high-quality imports from China. Then of course there is Trump and the very real threat of tariffs on European imports into the US.

Did we mention Ukraine? The collapse of the Assad regime in Syria served partly to highlight Russia’s exhausted resources and with it the potential for ever-more desperate measures on the battlefield in Ukraine. Gas prices have been quietly creeping up recently and this could complete the perfect storm for Europe. Amid all this, petty debates about eurozone inflation remaining above the technical target pale into insignificance. The ECB must simply do what it can to lower funding costs for European governments and consumers, almost regardless of the inflationary picture. The only question remains how pragmatically and quickly the central bank will respond to the emergency.