The European Central Bank on Thursday lowered interest rates by 25 basis points, bringing the deposit facility rate to 2.5%.
The widely expected move marks the central bank’s sixth rate cut in nine months, as policymakers seek to support an economy grappling with sluggish growth and the looming threat of US tariffs on EU imports.
In its statement, the ECB noted that monetary policy is now “meaningfully less restrictive,” with rate cuts making borrowing cheaper for businesses and households, leading to a pickup in loan growth.
Following the ECB’s decision, the euro rose 0.2% against the dollar to $1.081.
Inflation has declined from a peak of 10.6% in October 2022 to 2.4% in February, while the deposit rate has reached its lowest level since February 2023.
The ECB also lowered its 2025 economic growth forecast for the fourth consecutive time on Thursday, projecting expansion at just 0.9%, slightly above last year’s 0.7% pace.
Inflation trends and economic growth
Despite the ECB’s policy shift, inflation remains a concern. Headline inflation in the euro zone is still below 3% but has shown some volatility in recent months.
February’s inflation rate eased to 2.4%, slightly higher than expectations but down from January’s reading.
Core inflation, which excludes volatile items like food and energy, also declined, suggesting some relief from persistent price pressures.
Growth in the euro area remains weak, with GDP rising by just 0.1% in the fourth quarter, according to Eurostat.
The modest expansion highlights the fragile state of the region’s economy, reinforcing the ECB’s decision to ease monetary policy.
Uncertainty over Trump tariffs and defense spending
The ECB’s rate decision comes amid heightened geopolitical and trade uncertainties.
US President Donald Trump has repeatedly threatened tariffs on European goods, though no specific measures have been announced.
The potential for new duties remains a key risk for the euro zone, with European leaders weighing their options for negotiation.
At the same time, European governments are ramping up defense spending in response to shifting geopolitical dynamics, particularly as US-Ukraine relations deteriorate.
Increased military expenditures could influence inflation and economic growth, adding another layer of complexity to the ECB’s policy outlook.
With economic headwinds still in play, the central bank’s easing measures signal an effort to balance inflation control with the need to stimulate growth in an uncertain global environment.
Markets are now pricing in nearly two additional rate cuts this year following the ECB’s decision on Thursday.
This is slightly fewer than before Tuesday’s German budget announcement but remains within the range of expectations seen in recent weeks.
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