Navigating high inflation & slow growth: How ECB policy shapes the eurozone’s timid progress

Market insights from Inki Cho, Senior Financial Markets Strategist at Exness.

So far, 2025 has proven to be the year of reckoning for the eurozone economy, caught in the crosshairs of high inflation and sluggish growth. In a delicate balancing act, the ECB (European Central Bank) changed course with consecutive interest rate cuts this year, following aggressive monetary policy tightening during the 2022-2024 high inflation period.

As the region grapples with weak demand, geopolitical uncertainty, and looming trade risks, questions remain about whether these measures can sustainably stabilize prices without derailing progress.

Transitioning from inflation combating to cautious easing

The ECB’s current policy reflects lessons learned from its delayed response to post-pandemic inflation, which peaked at 10.6% in October 2022. Supply chain bottlenecks, energy shocks from Russia’s war against Ukraine, and pent-up demand drove prices to 40-year highs. 

The central bank’s reluctance to raise interest rates intensified inflationary pressures. Comparatively, its subsequent rate hikes were decisive; from 0.5% in 2022, the deposit facility rate rose to 4.75% by the second half of 2024. Before the beginning of 2025, inflation across the eurozone eased to 2.2%, nearing the bank’s 2% target.

This disinflation allowed the ECB to pivot, cutting rates by 25 basis points in March and April 2025. The deposit rate now stands at 2.25%, with further reductions anticipated amid weakening growth indicators. However, policymakers remain cautious as core inflation (excluding energy and food) remains at 2.4%. Wage growth and a resilient services sector underpin this sticky inflation. Yet ECB President, Christine Lagarde, is not concerned, as she noted in April, “The disinflation process is well on track, but we remain data-dependent to ensure price stability is durable”.

Two sides of the same coin: Growth support versus inflation risks

The ECB’s monetary policy easing aims to boost the sluggish eurozone economy, which grew only 0.7% in 2024. The main reason behind this deceleration was Germany’s stagnating economy(Europe’s largest), which weighed heavily on the region’s growth. 

On the flip side, the looser monetary policy lowered borrowing costs, which, in turn, are expected to provide some stimulus by:

• Boosting consumer spending: As real incomes grow, household savings rates, which have been elevated since 2022, are expected to decline gradually.
• Revitalising housing markets: Mortgage demand has soared due to rate cuts, especially in Southern Europe.
• Supporting exports: As a rule, a weaker currency aids manufacturers by making EU-made products more affordable overseas. The euro has dropped 6% against the US dollar since late 2024, providing stimulus to the eurozone’s supply chains.

Although the early signs look promising, the European economy’s growth remains uneven, as shown below:

Nevertheless, risks loom large on the horizon. Amid the flurry of US tariffs, ECB officials voiced concerns that these tariffs might have a damaging effect on the automotive and agriculture sectors, costing the eurozone’s economy 0.5 percentage points this year. Corroborated with China’s slowdown, this threatens the export-led rebound, which is instrumental to the ECB’s future plans.

Europe versus the US in the tariff battle

The much-debated reciprocal tariffs imposed by the Trump administration have added more pressure on the eurozone, translating to a 20% levy on EU imports. This could trigger retaliatory measures, disrupting 360 billion EUR in annual transatlantic trade.

Although the 90-day respite agreed upon in April offers a breather, that’s only temporary, and vulnerabilities remain. Moreover, the eurozone’s high dependence on exports, which account for 46% of its GDP, and reliance on imported energy, covering 60% of the global consumption, make it particularly susceptible to protectionism and supply chain disruptions.

What’s up in markets?

Reflecting these vulnerabilities, the leading European benchmark indices have experienced heightened volatility over the past six months. The pan-European Euro Stoxx 50 (SX5E) index, tracking the performance of 50 blue-chip eurozone stocks, led the trend. 

Between October 2024 and April 2025, the index plummeted 9.33%, with notable price swings. Stoxx 50 fell 17% between November 2024 and January 2025 to 4,540.20 on US tariff threats after peaking at 5,496.73 in October 2024, when the ECB announced rate hikes. Energy prices spiked before stabilizing near 4,900 in April after the ECB confirmed its 25-point rate cuts.

Export activities moved Germany’s DAX 30 index amid trade uncertainty targeting the automotive sector. Trading flat in October 2024, the export-heavy benchmark tumbled 20.3% to 18,489.91 from 23,204.59 in December 2024, when the Trump administration proposed the 20% tariffs on vehicles. In March 2025, it increased by 15.2%  to 21,300.31, boosted by the ECB’s rate cut signals. On April 17, however, the index inched 0.6% lower to 21,044.07.

France’s CAC 40 slipped 5.5% over three months but remained relatively resilient to market turbulence.  Between March and April 2025, the benchmark slipped 9.76% as US tariffs hit Airbus and luxury goods. In mid-April, the index recovered 2.37%, boosted by banks. However, it remained 1.29% low YTD. 

Against this backdrop, what happens next is anyone’s guess. For the time being, the markets are pricing in two more 25-point rate cuts in 2025. Only time will tell whether this will materialize.