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The European Central Bank lowered its benchmark interest rate by a quarter to 2.5%, as it suggests that the cut borrowing costs could slow.
The widely expected move on Thursday was the sixth drop in the European Central Bank’s deposit rate since the central bank began its velocity cycle last June, when the benchmark soared at a record 4% inflation.
In a tone of a more hawkish stance, the ECB said, “monetary policy is becoming less and less restrictive.”
The language suggests lowering or stopping future interest rates because it compares to the ECB’s previous wording “monetary policy remains restrictive.”
ECB President Christine Lagarde said the shift in wording “is not a harmless change.” Lagarde has raised its prospect of suspending the European Central Bank’s tax cuts, saying those who set interest rates will be led by “data instructions.”
Lagarde also said there was no opposition to the decision to lower interest rates – despite an interest rate setting, Austria’s Hokesh Central Bank governor Robert Holzmann abstained.
After the decision, traders bet on future lower interest rates.
According to levels implied by the swap market, while they continue to continue full price at a quarter of this year, the chances of a second cut in 2025 have dropped from about 85% to about 55%.
After the European Central Bank decision, the euro rose 0.4% to $1.083.
“The direction of travel for the ECB is no longer as clear,” Carsten Brzeski wrote in Ing’s notes to clients, pointing out changes in wording.
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Inflation fell from 10.6% in October 2022 to 2.4% in February, with deposit rates now the lowest since February 2023.
The outlook for the eurozone economy may also be affected by the moves of German training prime minister Friedrich Merz to borrow hundreds of billions of euros to increase defense spending and overhaul its country’s infrastructure.
Some analysts predict that the plan will increase to 2% in expected growth next year.
The eurozone benchmark German debt lost more foundations after the European Central Bank decision after a huge sell-off after the country’s historic stimulus announcement. This has driven the 10-year Bund yield to 0.09 percentage points to 2.87%.
In a forecast announced by Merz this week, the ECB cut its 2025 growth forecast, the sixth consecutive downgrade of the forecast – as well as 2026 and 2027.
Eurozone GDP is now expected to increase by only 0.9% this year, compared with a 1.1% forecast for December.
“Home and abroad, high uncertainty is hampering investment, and competitive challenges are pressured to exports,” Lagarde said on Thursday afternoon, with growth rate of 0.7%.
But Lagarde added: “The increase in defense and infrastructure spending may also increase growth” and “it may also increase inflation through the impact on aggregate demand.”
Before the ECB decision, Goldman Sachs economists wrote in a notice that German debt-funded drives higher defense spending and infrastructure investments “apparently lowers the pressure on the ECB” to lower interest rates below 2%.
The ECB raised its inflation forecast from its December estimates, with its estimates of higher energy prices at 2.1% to 2.3%.
It added that “most basic inflation measures” indicate that it stays on track to reach its 2% target.
Pooja Kumra, interest rate strategist at TD Securities, said the ECB is “certainly more cautious” about future layoffs as she hints at U.S. President Donald Trump’s threatening tariffs on the EU.
“Financial uncertainty [policy] And tariffs, they cannot promise any roads. ” she said.
“If inflation and growth figures match expectations in the coming months, the ECB could cut it to 2.25% in April again, and then the fiscal and tariff impacts are clearer in June,” said Neil Mehta, portfolio manager at RBC Bluebay Asset Management.
