The European Central Bank has cut its main interest rate to 2.5% from 2.75%, marking the sixth reduction in just nine months. In a notable shift in tone, ECB President Christine Lagarde stated that “monetary policy is becoming meaningfully less restrictive,” suggesting that the central bank may soon slow or pause its rate-cutting cycle.
The decision comes as inflation in the eurozone has eased significantly from a peak of 10.6% in October 2022 to 2.4% in February bringing the deposit rate to its lowest level since February 2023. However, despite these gains, the ECB has also lowered its economic growth forecasts for 2025, with Euro area GDP expected to expand by only 0.9%, compared to the 1.1% predicted in December.
Market reactions have been immediate. Following the rate cut, traders trimmed their expectations for further reductions; while one additional quarter-point cut is still anticipated in April, the likelihood of a second cut in 2025 has fallen from about 85% to roughly 70%.
The rate adjustment comes at a time of heightened global uncertainty. Potential US tariffs on EU imports and increased defence and infrastructure spending in Germany, as part of Chancellor Friedrich Merz’s fiscal plans, are contributing to a volatile economic environment. Lagarde noted that while such measures could ultimately boost growth, they also pose risks that the ECB must monitor closely.
