ECB Reduces Rates, Signals Further Easing Possible

LONDON (Reuters) - The European Central Bank cut interest rates on Thursday and kept the door open to further policy easing as concerns over lacklustre economic growth supersede worries about persistent inflation.

It was the fifth ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB rate cut since June and markets expect two or three more this year, driven by arguments that the biggest inflation surge in generations is nearly defeated and the flagging economy needs relief.

MARKET REACTION:

Germany's 10-year bond yield was last down 6 basis points on the day at 2.51%, having dropped earlier after weak growth data.

The euro was down just 0.1% at $1.0412, broadly in line with where it was trading before the decision, while the pan-European STOXX 600 index was up 0.6%, within a whisker of its record intraday high reached earlier in the session.

COMMENTS:

CARSETN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:

"The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB's press statement was almost a verbatim copy of the December statement in the key paragraphs. So, judging from the policy statement, there are no changes to foward guidance. The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB sticks to its meeting-by-meeting approach."

"However, at 2.75%, the deposit interest rate is still restrictive – too restrictive for the eurozone economy's current weak state. The recent surge in bond yields has also worsened financial conditions in the eurozone. Even if some argue that monetary policy can do very little to solve structural issues, political instability and uncertainty in many countries will force the ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB to continue doing the heavy lifting."

MATHIEU SAVARY, CHIEF EUROPEAN STRATEGIST AT BCA RESEARCH, MONTREAL:

"The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB maintains its direction and sees no case to reevaluate policy until the deposit rate hits 2% this June, or its estimate of neutral."

"Beyond that point, we expect two to three additional cuts: wage growth will fall back to 2%, unit profits are weakening, and most importantly, the U.S. trade policy remains a major drag on European economic activity."

ARNE PETIMEZAS, DIRECTOR RESEARCH, AFS GROUP, AMSTERDAM:

"A well-telegraphed, widely expected move. A March cut should not be contentious either, but after that, the hawks will need convincing. I am expecting a pause in April."

SAM ADAMS, EUROZONE ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:

"Fading inflationary pressures make the need to keep policy rates at an elevated level increasingly doubtful, as reflected in today’s decision. Going forward, policy rates thus have more room to fall."

"However, the pace and depth of cuts will need to be carefully navigated by the ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB. It might have to deliver more cuts than investors are currently anticipating if downside risks to the outlook were to materialise, such as a potential trade conflict with the new U.S. administration. On the other hand, the pervasive sense of pessimism notwithstanding, the economy has held up quite well so far."

"Until the Governing Council sees any loss of momentum in the data, it won’t be in a rush to lower rates, either. Given these tensions, our view is that they will tread a middle path and deliver three more rate cuts until June, at which point the deposit rate reaches 2%."

KENNETH BROUX, SENIOR STRATEGIST FX AND RATES, SOCIETE GENERALE, LONDON:

"There is not much new, the key words in the statement are: data-dependent, meeting-by-meeting approach, not pre-committing to a particular rate path."

MARCHEL ALEXANDROVICH, ECONOMIST, SALTMARSH ECONOMICS, LONDON:

"The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB is starting 2025 in a similar way to how it finished 2024, by cutting interest rates and signalling that it expects to ease policy again in the coming months. As in December, there is a judgement that 'monetary policy remains restrictive', which is an indication that the Governing Council still has further work to do."

(Reporting by the Markets Team; Compiled by Dhara Ranasinghe)