The European Central Bank cut its key interest rate on Thursday, a step to boost an economy that’s struggling to grow as consumers burned by inflation warily eye price tags and businesses try to chart a course amid political turmoil in leading economies France and Germany.
The cut comes a day after the U.S. Federal Reserve held off on reducing rates, underlining the contrast between more robust growth in the U.S. economy and stagnation in Europe, which recorded zero growth at the end of last year.
The ECB’s rate-setting council cut the benchmark rate by a quarter percentage point to 2.75% at a meeting at its skyscraper headquarters in Frankfurt, Germany, with the focus on growth overtaking anxiety about inflation, which has fallen to near the bank’s target of 2%.
The ECB faces a juggling act since lower rates, while they help growth by making borrowing money more affordable, can fan inflation. Although inflation is down from its peak of 10.6% in October 2022, it is still above target and rose to 2.4% in December on higher energy prices.
Europe’s economy stagnated at the end of last year as its former growth engine, Germany, finished a second straight year of shrinking output, officials said Thursday.
Gross domestic product was flat with a zero increase in the final quarter of 2024 in the 20-nation eurozone, the EU statistics agency Eurostat said.
The economy slowed from 0.4% growth in the third quarter as businesses were unsettled by possible trade disruptions under the new administration of U.S. President Donald Trump. Consumers remained cautious about spending after being stung by inflation, even though inflation has come down from its peak of 10.6% in October 2022.
Germany is laboring under multiple headwinds including the loss of cheap energy from Russia, choking bureaucracy and political paralysis in Berlin. Its economy contracted 0.2% in the fourth quarter.
The German economy, Europe’s largest, also contracted 0.2% for all of 2024, the second straight year of declining output.
The outlook for this year isn’t much better. The government slashed its 2025 forecast on Wednesday to 0.3% from 1.1%.
Leading European economies Germany and France are both unsettled by political turmoil that has left businesses and consumers uncertain about what the future holds in terms of government spending, regulation and taxes. Germany’s confusion could clear up after a national election on Feb. 23 following the collapse of Social Democratic Chancellor Olaf Scholz’ governing coalition, which has been mired in months of bickering over what to do about the economy.
France may take longer to emerge from paralysis, since the parliament is deeply divided and a new election can’t be held until July at the earliest. Political forces are at odds over how to address the country’s large budget deficit.
Business prospects have been unsettled by the election of Trump, whose advocacy of new and higher import tariffs could hurt Europe’s export-oriented economy. Slowing uptake of electric vehicles and Germany’s cancellation of purchase subsidies for EVs has hurt demand for parts suppliers.
Measures of consumer optimism such as the economic sentiment index compiled by the EU’s executive commission indicate consumer are fretting over prices. It’s unclear if they expect higher prices in the future, possibly due to the threat of tariffs from the new Trump administration, or if they are responding to recent price increases.