On Thursday, the European Central Bank reduced interest rates by 25 base points and updated the language in its decision to say that monetary policy became “significantly less restrictive”.
The decrease bears the deposit rate of the ECB, its key rate, to 2.5% – a decision in which the markets had largely evaluated before the announcement.
The president of the ECB, Christine Lagarde, said after the decision that it was a “result of a substantial discussion”, without the members of the board of directors opposed it, although a governor of the Central Bank had abstained.
“Monetary policy becomes significantly less restrictive, as interest rate reductions make new loans cheaper for businesses and households and the growth of loans is accelerating,” the central bank said in a statement on Thursday.
This language change compared to the comments of the ECB in January – when the central bank still characterized monetary policy as “restrictive” – was interpreted as a bellicist change.
“Political decision-makers are clearly more cautious about new rate drops,” said Jack Allen-Reynolds of Capital Economics.
Morgan Stanley economists said that the change in tone indicated that a break was in the cards, but that more rate drops should be expected.
“Communication … suggests more rate drops – we expect the ECB to cut both in April and June. However, at the same time, it opens the way for a break, which, in our view, will come in July,” they wrote in a note.
At 2:53 p.m., London time, the euro increased 0.34% compared to the dollar. Bond yields of the government of the euro zone, on the other hand, were far higher, having already increased in the midst of a world bond sale. The yield in German obligation at 10 years continued its upward trajectory after the decision of the ECB and was the last more than nine base points.
The six drops in the central bank in the last nine months have occurred in the middle of dull economic growth in the region, and as a spectrum of EU import prices in the United States.
The inflation of securities in the euro zone remains below the 3%mark, despite recovery in the last months of 2024.
The data published earlier this week showed that inflation in the region took place at 2.4% in February, down compared to the read of January, but a little higher than expected. The so -called basic inflation – which eliminates the costs of food, energy, alcohol and tobacco – as well as the inflation of the services also dropped after proving sticking for several months.
On Thursday, the ECB reiterated that the disinflation process was “well on the right track”, but noted that domestic inflation remained “high”.
“Most of the measures of underlying inflation suggest that inflation will settle around the medium-term objective of the governance council on a sustained basis,” he added.
Adjustments of economic perspectives
The central bank also published its latest economic projections on Thursday.
“The staff now consult the inflation of the securities on average 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision of the inflation of the securities for 2025 reflects a stronger energy price,” said the bank.
In December, the central bank still expected inflation on average 2.1% in 2025.
The adjusted gross domestic product in the euro area region, on the other hand, explained an increase of 0.1% in the fourth quarter, the last reading of the Statistical Agency Eurostat watch.
ECB staff projections on Thursday revised the prospects for economic growth in the region below, citing “continuous challenges”. It now expects growth of 0.9% in 2025, 1.2% for 2026 and 1.3% for 2027.
The previous projections had been shown up 1.1% this year.
“Decreasing revisions for 2025 and 2026 reflect a decrease in exports and a continuous weakness of investment, in part from the uncertainty of high trade policy as well as the uncertainty of wider policies,” the Central Bank said on Thursday.
Price uncertainty
Thursday’s rate decision is said that US President Donald Trump pursues an aggressive global tariff policy and European leaders are looking to increase defense expenses.
Prices on goods imported into the United States of Europe have not yet been announced, but have been threatened several times by Trump. The extent of these functions is not clear and the negotiation option could always be on the table.
Lagarde said Thursday that growth risks remained downwards, citing business tensions.
“An escalation of trade tensions would reduce the growth of the euro zone by mitigating exports and weakening the world economy,” she said.
“Continuous uncertainty about global trade policies could lead to investments.
European countries also seek to stimulate their defense and security budgets, relations between the United States and Ukraine. An increase in defense expenses could affect key economic markers such as inflation and growth.
The Lagarde of the ECB has approached both the European Union’s REARM plan and the proposals for a budget change in Germany, claiming that they were a “work in progress” and that conclusions on how plans would contribute to growth and impact inflation would be formed when more details are available.
“But one thing that, around the board of the board of directors, was clear, is that on the two accounts, it would be favorable to European growth as a whole and would be a boost to the European economy,” she said.
For the future, Lagarde refused to rely on the question of whether the central bank would hold the stable rates at its next meeting in April. In response to a question from Annette Weisbach from CNBC, Lagarde said that the current uncertainty meant that it was more important than ever that the board of directors was dependent on data.
“If the data tell us that to reach [our] Destination, the appropriate monetary policy should be to cut, we will, but if on the other hand, the data indicate that this is not the case, then we will not cut and we pause. It is therefore really there that we are: not pre -order, be dependent on the data, like never before, and decide a meeting by meeting. “”
– CNBC Chloe Taylor has contributed to this report.
