Central Bank of Europe decreases its principal policy rate by 0.25% to 2% once more.
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Eurozone Economic Outlook: All Eyes on Trade Policies
The eighth interest rate drop in a year! On June 5, 2020, the European Central Bank (ECB) slashed its key interest rate by 0.25 percentage points to fire up economic growth within the eurozone. With inflation poised to hit the 2% target, this deposit rate now stands at 2%.
Currently, inflation in the eurozone hovers around the ECB's set target, but the future looks less optimistic, thanks to the ongoing trade spat with Washington. By 2024, the easing of inflation in the eurozone has enabled the institution to loosen its monetary policy, reversing the tightening cycle initiated two years ago to combat raging prices, pushing the deposit rate to an all-time high of 4%. The ECB has revised its inflation forecast to 2% for 2025, down from 2.3% earlier. The indicator is predicted to drop to 1.6% in 2026 and settle at 2% in 2027.
"Crucial Crossroads..."
Focus has shifted to the persistently sluggish economic activity within the 20 eurozone countries, where slow demand could set off deflationary tendencies. The ECB warns that uncertainties surrounding trade policies will curb investments and exports in the short term, but increased public spending and labor market resilience will boost growth and consumption, making the economy stronger against external shocks.
The significant threat now comes from the White House, where the president continues to grumble about the European Union's substantial trade surplus with the U.S. and maintains uncertainty about the looming impact. Trump's ultimatum for 50% tariffs on European goods expires on July 9. The administration has already escalated tariffs on steel and aluminum imports from Europe to 50% on Wednesday, a move that was "strongly" condemned by the European Commission.
In Depth: Eurozone Economic Forecast & Inflation Projections
- 2025 Growth: The eurozone is likely to witness moderate economic growth of approximately 0.9% in 2025. This comes after a downgrade in expectations mainly due to crippling tariffs and heightened uncertainty related to US trade policy changes.[4][5]
- 2026 Growth: Growth is expected to pick up slightly to 1.4% in 2026, thanks to a rebound in consumption and investment.[4][5]
Breaking It Down: Inflation Projections
- 2024 Inflation: Headline inflation in the euro area averaged 2.4% in 2024.[5]
- 2025 Inflation: Inflation is predicted to remain stable at around 2% in 2025, with a marked decrease foreseen around mid-2025 as disinflation picks up speed faster than anticipated. This can be attributed to ongoing trade tensions.[2][5]
- 2026 Inflation: Inflation is expected to average 1.7% in 2026, which brings it closer to the ECB's target.[5]
Ride the Wave!
The recent ECB interest rate cuts aim to generate economic growth by lowering borrowing costs and encouraging investments. Yet, their impact is hampered by global economic uncertainties, especially trade tensions with the U.S.[5]Apart from that, rising tariffs and trade policy uncertainties have resulted in a downward revision of economic growth projections for the eurozone, highlighting the challenges posed by external factors.[4][5]
- The European Union's business sector is closely watching trade policies, as ongoing disputes with the United States could impact investments and exports within the Eurozone, according to the European Central Bank (ECB).
- The finance industry is keeping a close eye on the Eurozone's economic outlook, given the potential influence of trade policies on the zone's inflation rate and its subsequent impact on the monetary policy of the ECB.
- Political leaders in the European Union are evaluating the general-news repercussions of ongoing trade conflicts, as they could impact economic growth and stability within the zone, potentially leading to policy changes in the industry sector.
