Modest but steady economic growth lets Europe get by without an interest rate cut

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FRANKFURT, Germany (AP) — Signs of a modest economic upswing in Europe will likely let the European Central Bank keep interest rates unchanged Thursday for a fourth straight meeting.

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President Christine Lagarde has said at recent meetings that monetary policy remains “in a good place” with the benchmark deposit rate at 2%. Analysts expect that language or something similar to be repeated at her news conference after the decision by the bank’s rate-setting council.

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The bank last cut rates at its June meeting.

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Surveys of purchasing managers by S&P Global slipped slightly for December but still showed business activity expanding as the year comes to an end, reinforcing expectations that the 20 countries using the euro currency will continue to see growth of around 0.3% per quarter over the previous quarter, said Adrian Prettejohn, Europe economist at Capital Economics.

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That outcome is better than feared during turbulent trade negotiations with the United States over the summer, which finally settled with a 15% tariff, or import tax, imposed on European goods by U.S. President Donald Trump.

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That is not great for European exporters. But Trump had threatened higher rates and the deal struck with the European Union’s executive commission appears to have removed uncertainty and made it easier for businesses to make decisions.

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The economy can get by without the added boost from a cut, analysts say.

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“The haze of economic uncertainty has somewhat lifted, especially regarding trade,” economist Lorenzo Codogno said. “This will give the governing council greater confidence that it is in a ‘good spot,’ likely eliminating any remaining easing bias” toward rate cuts.

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On top of that, inflationary pressures remain too high for the ECB to contemplate a cut.

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The headline rate of 2.1% for annual inflation in November is roughly in line with the bank’s goal of 2% thanks in part to a drop in volatile energy prices. But inflation was higher at 3.5% in the services sector, which encompasses much of the economy from hairdressers and hotels to concert tickets and medical services.

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Central bank rate cuts can support growth because they strongly influence borrowing rates throughout the economy, lowering credit costs and promoting credit sensitive purchases such as new homes by consumers or new production facilities by businesses. Higher rates have the opposite effect and are used to contain inflation by dampening demand for goods.

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