The European Central Bank is betting on increased government spending to offset the impact of trade wars, as it cuts its main interest rate to 2% in an effort to bolster flagging eurozone growth. This is the eighth quarter-point reduction in a year, a clear sign of the central bank’s strategy to combine monetary easing with fiscal support.
The 20-member currency bloc has experienced a significant slowdown in economic activity, with particularly acute slowdowns observed in France, Germany, and Italy. The pessimistic forecasts for the upcoming year have intensified the pressure on the central bank to make borrowing more affordable and stimulate investment.
The ECB’s decision also coincided with a fall in eurozone inflation below its target. While acknowledging the detrimental effects of trade policies, the central bank explicitly stated that rising government investment in defense and infrastructure would support growth. ECB President Christine Lagarde, while expressing caution, highlighted the resilience of the labor market and private sector balance sheets as key strengths.
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