The European Central Bank (ECB) made the anticipated decision to lower interest rates on Thursday, while also leaving the possibility open for further reductions amidst a potential trade conflict with the U.S. and plans for increased military expenditure, which are contributing to Europe’s most significant economic policy shifts in decades.
Easing measures continue amidst economic challenges
Marking the sixth easing since June, the ECB reduced its deposit rate to 2.5 percent, acknowledging the ongoing issues of declining inflation and sluggish growth. The bank indicated that interest rates were still constraining growth, albeit to a lesser extent than previously.
This phrasing implies that additional rate cuts may be on the horizon, as the institution has consistently stated that restrictions are no longer warranted while inflation, recorded at 2.4 percent last month, is on a trajectory to return to its 2 percent target this year.
Read more: Markets surge after ECB cuts interest rates for fifth time to 2.75 percent
ECB’s revised stance on monetary policy
“Monetary policy is becoming meaningfully less restrictive,” the European Central Bank mentioned in its statement, revising its earlier position that interest rates remained restrictive. “The disinflation process is well on track.” This subtle change in wording signifies that a further rate cut in April is not guaranteed, as more cautious voices within the policy-making community are already advocating for restraint.
Acknowledgment of changing economic landscape
On the same day, the ECB also revised its 2025 economic growth forecast for the fourth consecutive time, estimating growth at merely 0.9 percent, which is just slightly above the 0.7 percent growth recorded last year.
Inflation projections for this year have been adjusted to 2.3 percent, an increase from the 2.1 percent forecasted three months prior.
“The downward revisions (in growth) 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 European Central Bank stated.
ECB President Christine Lagarde may recognize that these forecasts only partially account for the current outlook, given the extraordinary changes that have occurred since the deadline for compiling these statistics.
