The European Central Bank (ECB) reduced interest rates by 25 basis points on Thursday, bringing the deposit facility rate down to 2.5%. The decision, widely expected by markets, marks the latest attempt to support the eurozone economy amid weak growth and persistent global trade tensions.
Shift in ECB Language Signals Policy Change
ECB President Christine Lagarde emphasized that the move followed “substantive discussion,” with no opposition among Governing Council members, though one governor abstained. The ECB also updated its policy stance, stating that monetary policy is becoming “meaningfully less restrictive.” This change from its previous characterization of policy as “restrictive” suggests a potential slowdown in further rate cuts.
“Policymakers are clearly becoming more cautious about further rate cuts,” said Jack Allen-Reynolds of Capital Economics.
Market Reaction and Rate Cut Expectations
Following the announcement, the euro rose 0.34% against the U.S. dollar, while European bond yields climbed. Morgan Stanley economists noted that while additional rate cuts in April and June are likely, the ECB may pause in July.
Eurozone headline inflation has remained below 3%, despite a slight increase late last year. February data showed inflation easing to 2.4%, though core inflation and services inflation have remained sticky.
“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis,” the ECB stated.
Economic Outlook Adjustments
The ECB also released revised economic projections, now forecasting inflation at 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027. The 2025 inflation forecast was raised due to stronger energy price dynamics.
Economic growth projections were revised downward, with GDP now expected to grow 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027, reflecting weaker exports and investment.
Trade Tensions and Tariff Uncertainty
The ECB’s decision comes amid growing global trade concerns, including U.S. President Donald Trump’s aggressive tariff policies. While no tariffs on EU imports have been finalized, ongoing threats of new duties have added to market uncertainty.
Lagarde acknowledged that trade tensions pose a downside risk to growth: “An escalation in trade tensions would lower euro area growth by dampening exports and weakening the global economy.”
Defense Spending and Fiscal Policy Implications
European nations are also ramping up defense spending, with Germany’s proposed fiscal shift and the EU’s ReArm plan under discussion. Lagarde noted that while these initiatives remain “a work in progress,” they are expected to support European growth.
Looking Ahead: A Data-Driven Approach
Lagarde refused to commit to further rate cuts in April, reiterating that decisions will remain data-dependent. “If the data indicates to us that in order to reach [our] destination, the appropriate monetary policy should be to cut, we shall do so. But if the data indicates otherwise, then we shall pause,” she said.
As the ECB navigates economic uncertainty, policymakers are balancing inflation control with the need to stimulate growth amid trade tensions and shifting fiscal policies.
