The European Central Bank has once again cut borrowing costs—for the fifth time since June—citing stagnant economic growth and inflation inching tantalisingly close to its 2% target. The latest quarter-point reduction, bringing the deposit rate down to 2.75%, was widely expected. Yet, in true ECB fashion, the institution balanced this predictability with an almost poetic vagueness about what happens next.

Christine Lagarde, the ever-diplomatic President of the ECB, assured markets that the Bank knows “the direction of travel.” However, anyone hoping for clear guidance would do well to lower their expectations. “It would be totally unrealistic,” she said, “to provide strong forward guidance, simply because we are facing significant and probably increasing uncertainty.” In other words, we’re on a journey; we just don’t know exactly where it leads, how long it will take, or whether we’ll need to take a few detours along the way.

Investors believe that Lagarde’s carefully worded non-commitments signal further cuts are in store. Market bets on additional easing surged, pricing in three more reductions by the end of the year. Bond markets reacted accordingly, with Germany’s two-year yield plunging 10 basis points—its steepest decline in two months. Meanwhile, the euro remained relatively stable, propped up by a weaker US dollar.

But behind this carefully managed ambiguity lies a more troubling reality: Europe’s economy is faltering, and the ECB is running out of tools to fix it. The eurozone unexpectedly stagnated at the end of 2024, dashing the central bank’s modest growth expectations. Germany and France, the region’s two economic heavyweights, are grappling with political instability and sluggish production, making it difficult to see where any meaningful momentum will come from.

Then there’s the ever-present spectre of Donald Trump, whose protectionist instincts are already complicating matters. His return to the White House has cast a long shadow over global monetary policy, limiting how far the Federal Reserve can lower US interest rates. This, in turn, constrains the ECB’s ability to ease without exacerbating currency imbalances. The prospect of higher US tariffs on European goods further fuels uncertainty, yet Lagarde and her colleagues appear unconvinced that such measures would meaningfully push inflation back up.

For now, the ECB maintains that inflation is “on track,” even as core prices remain uncomfortably sticky in key service sectors. Officials take comfort in their models, which suggest that wage growth will moderate and price pressures will ease. The Bank of France’s François Villeroy de Galhau even described himself as “vigilant but not worried” about inflation—though such confidence may not be universally shared if growth continues to disappoint.

Ultimately, the ECB’s problem isn’t just the economy; it’s credibility. Repeating cutting rates while insisting that policy remains “restrictive” risks sending mixed signals to markets, businesses, and consumers. If growth continues to falter, pressure will mount for even deeper cuts, potentially undermining the Bank’s cautious approach. And if inflation rises, it may have to execute another embarrassing policy reversal.

So, for now, the ECB will continue its delicate balancing act—lowering rates just enough to appear proactive, but not enough to fully address Europe’s deep-rooted economic malaise. The real question is whether it has a plan or is simply hoping that economic gravity will do the work for it.