In the recent statements made by Christine Lagarde, the President of the European Central Bank (ECB), a new clarity regarding the monetary policy path for the Eurozone has emergedSpeaking at the European Banking Congress in Frankfurt, she emphasized that the "2% inflation target is within reach," signaling a potential for further interest rate cuts contingent upon supportive dataThis declaration marks not only a shift in ECB strategy from an "inflation-first" approach to a balanced focus on growth and inflation, but also reflects a crucial turning point in the Eurozone’s economy after a stringent three-year period of tightening.

The underlying structural changes in inflation data serve as a foundation for this policy shiftIn January 2025, the Consumer Price Index (CPI) in the Eurozone rose by 2.6% year-on-year, which, although above the target level, is a significant decrease from the peak of 8.1% in 2024. Core inflation, stripping out energy and food, has dropped from 5.3% to 3.1%, while inflation in the services sector has moderated to 4.2%, the lowest since 2023. Particularly noteworthy is Germany, the economic engine of the Eurozone, where the harmonized CPI rose only 1.8% in January, indicating a waning of price pressures

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This data resonates with Lagarde’s assessment that the "peak inflation period is over."

Changes in the mechanisms of monetary policy transmission have created favorable conditions for lowering interest ratesSince commencing this easing cycle in June 2024, the ECB has slashed rates by a total of 125 basis points, bringing them down to 2.75%. There has been a notable improvement in interbank market liquidity, with Eurozone interbank borrowing rates declining from a peak of 4.5% to 3.2%, and the cost of corporate loans dropping from 5.8% to 4.1%. This easing in financing conditions has directly spurred a revival in the manufacturing sector, with the Purchasing Managers' Index (PMI) in January 2025 rising from 46.7 to 48.9, marking a 14-month high.

Revised expectations for economic growth have catalyzed this policy reversalThe ECB's latest forecasts have upgraded the GDP growth rate for 2025 from 1.2% to 1.8%, primarily driven by expansion in the service sector (which constitutes about 70% of GDP) and a rebound in consumer spendingThe IFO business climate index in Germany has increased for three consecutive months to reach 92.3, while the French consumer confidence index has surged to a high not seen since 2022. This dual characteristic of a "strong service sector and a weak manufacturing sector" necessitates that monetary policy stimulates overall demand without exacerbating structural imbalances.

The changing global economic landscape offers a policy window for the ECBThe Federal Reserve’s slower pace of interest rate reductions and stabilization of commodity prices have collectively improved the external demand environment for the Eurozone

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In January 2025, exports from the Eurozone grew by 4.2% year-on-year, ending 18 consecutive months of contractionThis improvement in external demand has alleviated the ECB's concerns over a potential recession, allowing for a more relaxed approach to advancing its easing policies.

However, the transition in policy faces several risk challengesThe first is the risk of sticky inflation; despite current data declining, wage growth in the services sector remains steady at 4.5%, raising the possibility of a "wage-price spiral." Next, there is the risk regarding debt sustainability, with Eurozone government debt reaching 95% of GDP; any 10 basis point increase in interest rates would add €20 billion to interest expensesLastly, geopolitical tensions, particularly a resurgence in the Middle East, could drive energy prices higher, reversing the downward trend of inflation.

Historically, policy transitions in monetary environments are often accompanied by market volatilityDuring the Federal Reserve's rate-cutting cycle in 2019, the S&P 500 index rose by 7% in the three months following the initiation of cuts, but subsequently faced a correction due to economic slowdownThe situation in the Eurozone is even more complex, as evidenced by the widening sovereign debt spreads (such as the Italy-Germany 10-year bond spread) expanding from a low of 120 basis points in 2024 to the current 180 basis points, indicating rising market concerns over the debt repayment capabilities of peripheral states.

Technological innovations and green transformations are injecting new momentum into the Eurozone economy

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Under the framework of the EU's Green Deal, an investment of €150 billion is set to flow into the clean energy sector by 2025, expected to drive a GDP increase of 0.8%. The progression of the digital euro project may reshape the payments system, enhancing the efficiency of monetary policy transmissionThe synergy between structural reforms and easing policies will be critical in determining whether the Eurozone can achieve the ideal state of "high growth and low inflation."

Amidst the backdrop of diverging global monetary policies, the decisions taken by the ECB hold significant benchmarking importanceAs the Federal Reserve aims for a soft landing and the Bank of Japan attempts to exit its Yield Curve Control (YCC) policy, the Eurozone's policy transition is poised to affect global capital flow patternsIn January 2025, global fund allocations to Eurozone equities rose to 22%, the highest levels since 2021, reflecting an international capital expectation for a revival in the Eurozone.

For investors, identifying the three core threads in the current environment is essential: firstly, cyclical stocks benefiting from rate cuts (such as banks and real estate); secondly, themes centered around green transformation (renewable energy, electric vehicles); and finally, sectors involved in technological innovation (AI applications, semiconductors). In terms of exchange rates, the euro against the dollar is expected to fluctuate within the 1.05-1.10 range, necessitating close attention to differences in policy rhythms between the ECB and the Federal Reserve.

Lagarde's address symbolizes the entry of Eurozone monetary policy into a "post-tightening era." The central challenge in this phase lies in balancing economic recovery efforts with the prevention of inflation rebound and financial imbalances

Historical insights reveal that the timing and scale of a shift in monetary policy often dictate the trajectory of economic cyclesFor the Eurozone, this moment presents both an opportunity to escape the quagmire of "low growth and high unemployment" and a critical test of its institutional resilienceThe forthcoming two years of policy maneuvers will significantly determine whether the Eurozone can carve out a favorable position in the restructuring global economic landscape.