The move aims to stimulate economic growth amid persistent inflation and slow recovery in the Eurozone amid a looming trade war as US President Donald Trump pushes tariffs against all major economies.
With 25 bps cut, ECB’s deposit facility rate (overnight interest rate on bank deposits) is now down to 2.50% from 2.75%. Likewise, ECB’s marginal lending rate (overnight borrowing interest rate) now stands at 2.90% from the previous 3.15%.
Implications of ECB decision
The decision to cut interest rates comes amid rising concerns over slowing economic growth in the Eurozone, higher inflation, and lingering global uncertainties.
By reducing interest rates, the ECB hopes to inject more liquidity into the economy, making borrowing cheaper for businesses and households. The move is likely designed to encourage investment and consumer spending, which have both been tepid in recent months.
The ECB had previously raised interest rates to a peak of 4% in response to soaring inflation, which reached 10.6% in October 2022. However, as inflationary pressures have eased – now standing at an annual rate of 2.4% – the central bank has gradually lowered rates since June.
Despite inflation cooling, economic growth in the eurozone remains weak. Data indicates that the region’s economy stagnated in the final quarter of 2024, showing no growth. Looking ahead the outlook remains uncertain, particularly in light of potential shifts in US trade policy under Trump administration.
Implications of ECB rate cuts on India
Here is how the ECB decision to cut interest rates may impact India and share market –
Currency dynamics: A depreciating euro could strengthen the rupee against it, which may benefit Indian exporters to the Eurozone. However, this could also enhance the appeal of the US Dollar, potentially influencing the rupee’s exchange rate with the dollar.
Investment trends: Lower interest rates in Europe might drive investors to seek higher returns in emerging markets like India, potentially increasing foreign portfolio investments (FPIs).
Inflationary effects: Looser monetary policies in Europe could contribute to a decline in global commodity prices, which may reduce India’s import costs, particularly for essential resources like crude oil and raw materials.
Trade balance: A weaker euro could influence India’s trade with the Eurozone, either by making Indian exports more competitive or reducing the cost of imports.
Monetary policy considerations: The ECB’s rate adjustments may lead the Reserve Bank of India (RBI) to reassess its own monetary stance, particularly if global economic conditions signal a need for policy easing.