In January 2025, the European Central Bank (ECB) lowered its key interest rates by 25 basis points, aligning with market expectations. The deposit facility rate now stands at 2.75%, the main refinancing rate at 2.90%, and the marginal lending rate at 3.15%. This move signals the ECB’s response to its updated inflation outlook, as price pressures continue to ease in line with projections.

Inflation Dynamics and Wage Adjustments

While inflation has moderated, domestic price pressures remain elevated due to lagging wage and price adjustments. However, wage growth is showing signs of stabilization, and corporate profits are absorbing some of the inflationary burden. These factors indicate a gradual normalization of inflationary dynamics, reducing the need for aggressive monetary tightening.

Easing Borrowing Costs Amid Tight Conditions

Despite persistent tight financing conditions, the rate cut is expected to gradually lower borrowing costs for businesses and households. This shift aims to support economic activity without compromising the ECB’s commitment to price stability. However, policymakers remain cautious, recognizing the need to balance growth with inflation control.

Read More: Euro Area Manufacturing PMI

A Data-Driven and Cautious Approach

The ECB has reiterated its data-driven strategy, avoiding any firm commitments to a predetermined rate path. By maintaining flexibility, the central bank aims to ensure inflation converges sustainably to its 2% target. As economic conditions evolve, future policy decisions will depend on incoming data, reinforcing the ECB’s measured approach to monetary policy.

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