Monetary policy: Is the ECB really playing its role in the face of the crisis?

The European economy is going through a period of instability where geopolitical tensions combine with a marked slowdown in growth. In this uncertain context, the European Central Bank (ECB) finds itself faced with a major challenge: reconciling the need to contain inflation with the urgency of reviving a weakened economy. To respond to these challenges, the institution headed by Christine Lagarde announced a further reduction in its key rate, lowered by 25 basis points to 3%. This decision, the third of its kind in six months, reflects a gradual and cautious approach. However, this choice triggers criticism. While some welcome the continuity of this policy, others point out a lack of boldness, and even consider that more ambitious measures would be necessary to stimulate consumption and investment.

A measured reduction in key rates

The European Central Bank (ECB) announced a reduction in its key rate, now set at 3%. This third consecutive decline since June 2024 is part of a strategy which aims to support a weakened European economy. During the press conference on Thursday December 12, 2024, Christine Lagarde, President of the ECB, reaffirmed the institution's priority: “our objective remains to guarantee inflation close to 2% in the medium term”.

This new monetary adjustment comes in a context where inflation, although clearly slowing, remains disparate depending on the sector. If the entire euro zone benefits from a lull in prices, certain areas, such as services, continue to be subject to inflationary pressures due to significant wage increases. Furthermore, the deterioration of the geopolitical situation is fueling fears of an additional energy shock, which reinforces economic uncertainties. Therefore, to respond to these challenges, the ECB favors a progressive approach, with a view to maintaining a delicate balance between stabilizing prices and preserving growth. Such caution, although justified by the risk of further weakening the economy, is nevertheless criticized by several economists. The latter believe that a more aggressive policy would have been necessary to quickly boost investment and employment in a faltering euro zone.

A debate on strategy: towards a more ambitious adjustment?

According to economists such as Christian de Boissieu, vice-president of the Circle of Economists, the caution displayed by the ECB could generate significant costs for the European economy. He insists on the urgent nature of more marked action: “given the deadlines for monetary policy action, it is now, and not in six months, that the ECB must act”. In reality, the beneficial effects of lower interest rates generally take a year or more to fully materialize, fueling criticism of the gradual approach adopted by the institution.

In this context, the notion of “neutral rate” takes on particular importance. This concept, estimated by the ECB between 1.7% and 2.5%, designates a threshold of equilibrium from which monetary policy ceases to be restrictive without becoming expansionary. Currently, the ECB maintains a margin of around 100 basis points before reaching this level. Some experts argue that lowering rates below this threshold, even temporarily, could accelerate the recovery of the economy while keeping inflation under control. Furthermore, Christine Lagarde has tempered these proposals and underlines that: “any decision must be based on the most recent data and not on hasty anticipations”.

This debate provides insight into the complex challenge facing the ECB: preserving its credibility as guardian of monetary stability and responding to growing pressures to further support growth and employment. While the current strategy favors caution, its long-term effects on the European economic situation remain uncertain, raising expectations for bolder adjustments in 2025.

The ECB's decisions on lowering the key rate reflect the search for a complex balance between prudence and intervention. While the objective of inflation stabilized around 2% seems within reach, sustainably relaunching the European economy remains a major challenge. This challenge is all the more important in a context marked by geopolitical uncertainties and increased economic fragility. The future choices, expected in 2025, will be decisive for the future of the euro zone. Investors and governments will carefully examine the ECB's ability to adapt its policy to reconcile monetary rigor and support for growth. Each adjustment could shape the economic recovery, but also the confidence placed in the institution.