Euro area inflation is stabilising to the target – Interest rate cuts will support growth in the economy

“We took the decision to reduce the policy interest rate by 0.25 percentage points to 3%. The direction of our monetary policy is now clear. The speed and scale of the rate cuts will be determined in each meeting on the basis of incoming data and comprehensive analysis,” says Governor of the Bank of Finland Olli Rehn. The policy rate is now one percentage point lower than it was in June, six months ago, before we began the rate cuts.

According to the December projections of the European System of Central Banks (ESCB), the euro area economy is expected to grow by 1.1% in 2025 and by 1.4% in 2026. This pick-up in growth will be supported by improved household purchasing power and a gradual recovery in investment. At the same time, manufacturing activity remains weak. The uncertainty over trade policy is weighing on the near term outlook, and the risks are on the downside.

“Trade and security policies have rarely been so intertwined as they are in Europe currently. The last thing we need is a trade conflict between allies. Negotiation is preferable, and the EU’s negotiating position can be strengthened by demonstrating in advance that it is ready to take countermeasures if the United States threatens Europe with higher tariffs,” says Governor Rehn.

Europe is Finland’s most important trading partner, but the significance of the United States as an export market has grown. US tariffs on imported goods would hamper Finland’s goods exports and dampen growth in the economy.

Public debt must be brought onto a sustainable path

Finland’s public finances are still far from being in balance. Weak productivity and various shocks to the economy have eroded the tax base, and public expenditure has grown faster than revenues. In one and a half decades, the public debt ratio has grown to a high level. If the measures set out in the Government Programme and in the Government’s spending limits discussion last spring are implemented in full, the public debt ratio will stabilise at the end of the government term, but it will still be very high. The aim must be to turn the debt ratio sustainably onto a downward path.

Stronger economic growth is essential if public services are to remain as they are. The task of the public sector is to create favourable and predictable conditions in which innovation and enterprise can thrive. “To support the creation and diffusion of innovations, we need to invest in human capital by both safeguarding higher education and enhancing work-based immigration. It is also important to strengthen access to finance for startups and other businesses at their growth stage,” says Rehn.

• Presentation 17 December 2024, Governor Olli Rehn (in Finnish)
• Bank of Finland Bulletin publication website