European Central Bank (ECB) Monetary Policy Decision summary

Monetary policy decisions and outlook

• ECB lowered its three key interest rates by 25 basis points, with the deposit facility at 2.75%, main refinancing at 2.90%, and marginal lending at 3.15%, effective 5 February 2025.

• The decision reflects updated inflation and economic assessments, with disinflation progressing as projected and inflation expected to return to the 2% medium-term target in 2025.

• Monetary policy remains restrictive, but recent rate cuts are gradually easing borrowing costs for firms and households.

• The ECB will maintain a data-dependent, meeting-by-meeting approach, with no pre-commitment to a specific rate path.

• APP and PEPP portfolios are declining as reinvestments have ceased; targeted longer-term refinancing operations have concluded.

Economic activity and recovery prospects

• Economic growth remains weak, with Q4 2024 stagnation and fragile consumer confidence, but labor markets are robust and unemployment is low at 6.3%.

• Rising real incomes and more affordable credit are expected to support a gradual recovery in demand and investment.

• Export growth is a potential, though uncertain, contributor to recovery, contingent on stable global trade conditions.

• Fiscal and structural reforms are encouraged to enhance productivity, competitiveness, and resilience.

• Manufacturing contracts while services expand, supporting a mixed sectoral outlook.

Inflation dynamics and risks

• Annual inflation rose to 2.4% in December, mainly due to base effects from energy prices, while food and goods inflation moderated.

• Services inflation remains elevated at 4%, driven by delayed wage and price adjustments, but wage growth is moderating.

• Most underlying indicators support a sustained return to the 2% target, with inflation expected to fluctuate near current levels before settling.

• Upside risks to inflation include higher-than-expected wage/profit growth, geopolitical tensions, energy prices, and climate events; downside risks stem from weak confidence, stronger policy impact, or global economic deterioration.

• Profits are acting as a buffer to inflation, and labor cost pressures are expected to ease.