On Thursday, the European Central Bank lowered interest rates by 25 basis points and modified the wording in its policy statement to indicate that monetary policy was becoming “meaningfully less restrictive.”
This reduction brings the ECB’s deposit facility rate—its key benchmark—to 2.5%, a move that had been widely anticipated by markets prior to the announcement.
Following the decision, ECB President Christine Lagarde stated that the rate cut was the outcome of “substantive discussion,” with no opposition from any Governing Council members, though one central bank governor abstained.
“Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up,” the central bank noted in its statement on Thursday.
The ECB’s shift in language from its January assessment—when monetary policy was still described as “restrictive”—has been interpreted by analysts as a more cautious stance.
“Policymakers are clearly becoming more cautious about further rate cuts,” Jack Allen-Reynolds of Capital Economics wrote in a note.
Economists at Morgan Stanley, on the other hand, suggested that while additional rate cuts are likely, the new language signals the possibility of a pause.
“The communication … suggests more rate cuts ahead – we expect the ECB to cut both at the April and June meeting. However, at the same time, it sets the stage for a pause, which we think will come in July,” they wrote in a note.
By 2:53 p.m. London time, the euro had strengthened by 0.34% against the U.S. dollar. Meanwhile, eurozone government bond yields were broadly higher, continuing their rise amid a global bond sell-off.
The yield on Germany’s 10-year bond climbed further following the ECB’s decision, increasing by more than nine basis points.
The central bank’s six rate reductions over the past nine months have coincided with sluggish economic growth in the region and growing concerns over potential tariffs on EU exports to the U.S.
Headline inflation in the eurozone remains below 3%, despite an uptick in the latter months of 2024.
Data released earlier this week showed that inflation in the region eased to 2.4% in February, marking a decline from January’s figure but still slightly exceeding expectations.
Core inflation—which excludes food, energy, alcohol, and tobacco—as well as services inflation, also declined after remaining persistently high for several months.
On Thursday, the ECB reaffirmed that the disinflation process was “well on track” but acknowledged that domestic inflation levels remained “high.”
“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 statement added.
Adjustments to Economic Outlook
The ECB also released updated economic projections on Thursday.
“Staff now see headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision in headline inflation for 2025 reflects stronger energy price dynamics,” the bank stated.
In its December forecast, the ECB had previously projected inflation to average 2.1% in 2025.
ECB Announce A Cut in Interest RatesMeanwhile, the eurozone’s seasonally adjusted gross domestic product grew by just 0.1% in the fourth quarter, according to the latest data from Eurostat.
On Thursday, ECB staff revised down their forecasts for economic growth in the region, citing “continued challenges.” The bank now expects GDP growth of 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027.
Previous projections had estimated growth at 1.1% for this year.
“The downward revisions for 2025 and 2026 reflect lower exports and ongoing weakness in investment, in part originating from high trade policy uncertainty as well as broader policy uncertainty,” the ECB said.
Uncertainty Over Tariffs
The rate decision on Thursday comes amid ongoing global trade tensions, with U.S. President Donald Trump pursuing an aggressive tariff strategy and European nations seeking to ramp up defense spending.
Although tariffs on European goods entering the U.S. have yet to be officially announced, Trump has repeatedly threatened to impose them. The extent of any such duties remains unclear, and negotiations may still be an option.
Lagarde on Thursday warned that downside risks to growth persisted, particularly due to trade tensions.
“An escalation in trade tensions would lower euro area growth by dampening exports and weakening the global economy,” she said.
“Ongoing uncertainty about global trade policies could drag investment down. Geopolitical tensions, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, remain a major source of uncertainty as well.”
At the same time, European nations are looking to bolster their defense and security budgets, especially as relations between the U.S. and Ukraine become increasingly strained. Higher defense spending could influence key economic indicators such as inflation and growth.
Lagarde also addressed the European Union’s ReArm initiative and discussions over fiscal policy changes in Germany, describing them as a “work in progress.” She emphasized that conclusions regarding their impact on inflation and economic growth would be drawn once more details emerge.
“But one thing that around the table of the Governing Council was clear is that on both accounts that would be supportive to European growth at large and would be a boost to the European economy,” she stated.
Looking ahead, Lagarde declined to speculate on whether the central bank would keep rates unchanged at its upcoming meeting in April.
Responding to a question for Annette Weisbach, she stressed that the high degree of uncertainty reinforced the importance of a data-dependent approach.
“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 on the other hand the data indicates that it is not the case, then we shall not cut, and we will pause.
So that’s really where we are: not precommitting, being data dependent, as ever, and deciding on a meeting by meeting basis.”
