ECB minutes show concerns over economic outlook and geopolitical risks

The European Central Bank (ECB) cut interest rates by 25 basis points to 3% at its December meeting, a decision aimed at supporting a eurozone economy that continues to struggle. 

But the account from the meeting, published on Thursday, 16 January, shows that policymakers were deeply divided over how aggressive the central bank should be in its approach. 

While some members argued for a sharper reduction to cushion the economy against mounting risks, others feared that moving too fast could send the wrong signal to markets.

A necessary move, but how far should the ECB go?

Sluggish growth and easing inflation were the main factors behind the ECB’s decision to lower rates. Fresh projections presented to the Governing Council in December painted a bleak picture, with the eurozone economy expected to recover more slowly than previously thought. Policymakers broadly agreed that “lower policy rates and a further easing of financing conditions” were needed to ensure inflation remained on track to stabilise at the bank’s 2% target.

However, there was no consensus on the size of the cut. While all members supported the 25-basis-point reduction, some believed that a larger move – 50 basis points – would have been more effective in shoring up growth. “A larger rate cut would provide insurance against downside risks to growth,” some members said, pointing to repeated downgrades in economic forecasts.

Others, however, pushed back, arguing that such an aggressive move might have unintended consequences. 

“A 50 basis point cut could be perceived as the ECB having a more negative view of the state of the economy than was actually the case,” the minutes noted. The concern was that markets could interpret a bigger cut as a sign of panic rather than a calculated adjustment.

Political and global risks add to uncertainty

The economic slowdown was not the only issue on the ECB’s radar. Policymakers also flagged growing political uncertainty within the eurozone and rising global trade tensions as key risks that could complicate the bank’s job in the months ahead.

One major concern was the impact of potential new US tariffs on Chinese goods, which could disrupt global trade flows. ECB members noted that, if China responded by redirecting exports to Europe, it could affect inflation and economic growth in unpredictable ways.

“The inflationary effects of the pre-announced US policies are likely to be bigger in the United States than in the rest of the world,” the minutes said, but the broader fallout remained unclear.

Closer to home, the political landscape in Europe was another source of concern, with France struggling to form a stable government and Germany heading for a snap election in February.

“Uncertainty about US policies had also been compounded by greater policy uncertainty in Europe,” the minutes stated, with policymakers stressing that European institutions would need to provide stability in a turbulent period.

What happens next?

Despite the rate cut, the ECB stopped short of signalling a clear path for future moves. Policymakers maintained a “data-dependent and meeting-by-meeting approach,” meaning they will assess incoming economic data before making further adjustments.

A key challenge is that some of the eurozone’s economic difficulties are structural rather than cyclical – issues that monetary policy alone cannot resolve. “Monetary policy could not take on responsibility for long-term growth,” the minutes stated, with officials arguing that governments needed to take a more active role in addressing structural weaknesses.

Looking ahead, markets expect further rate cuts in 2024, but the pace and timing remain uncertain. With inflation cooling but global risks rising, the ECB will have to tread carefully, balancing the need for economic support with the risks of moving too fast.