European central banks have started to ease policy rates. The combination of steady disinflation and a stagnant economy mean that inflation rates are approaching the Member States’ inflation targets. While annualised inflation in the EU stood at 2.3 % in October 2024, up from 2.1 % in September, inflation in the euro area rose to 2.0 % in October, up from 1.7 % in September, with volatility expected to persist owing to base effects from last year. The inflation rate is projected to fall below the ECB’s 2 % target in 2025, but declines in services inflation will be crucial to achieving this.
On monetary policy, a gradual easing is anticipated. The ECB cut its policy rates three times in the course of 2024, bringing the deposit rate to 3.25 %. In a recent speech, ECB xecutive Board member Isabelle Schnabel highlighted how different monetary tools influence economic stability. Quantitative easing proved effective at calming financial markets but had limited effects on broader financing conditions and requires slow unwinding. In contrast, targeted long-term refinancing operations (TLTROs) offer a flexible and swift reversal mechanism.
Recent analyses shed contradictory light on the ECB’s current monetary policy stance. One strand of analysis, comparing tightening cycles, found that the recent peak in monetary policy was less restrictive than in past cycles, with the disinflation process still incomplete. Another strand of analysis however, concludes that the current monetary policy stance is restrictive, with monetary policy restricting economic activity and positive supply forces strengthening it, thus leading to anaemic growth in the euro area.
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