The ECB cuts rates to 2.5%

As widely anticipated, the European Central Bank (ECB) reduced interest rates by 25 basis points at its meeting on 06 March, marking the sixth rate cut since it began easing monetary policy in June 2024. The deposit rate has now been lowered from 4.0% to 2.5%. The ECB stated that the disinflation process is progressing as expected.

The ECB’s inflation forecast remains largely unchanged. It projects headline inflation to average 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027. Core inflation, which excludes energy and food, is expected to be 2.2% in 2025, 2.0% in 2026, and 1.9% in 2027.

Although inflation is gradually aligning with the ECB’s 2% target, domestic price pressures persist, mainly due to delayed wage and services price adjustments following past inflation spikes. However, the ECB noted that wage growth is moderating and that profit margins are absorbing part of the inflationary impact, helping to contain broader price pressures.

There are many risks to the outlook, which remains unusually uncertain. US-EU trade tensions are flaring up. Trade barriers, potentially associated with supply chain disruptions, will slow the economy, which in turn will result in lower price pressures in a year or so. This may lead the ECB to cut interest rates further. 

Similarly, an intensification of the war in Ukraine, caused for instance by a reduction or a collapse of US support for Ukraine, would heighten uncertainty and risk slowing the euro area economy. In contrast, a ceasefire will lift confidence and spending, as might increased defence and infrastructure spending in Germany and the EU.  

In this uncertain situation, President Lagarde emphasised that the Governing Council will take a data-dependent, meeting-by-meeting approach to policy and is not committing to a specific rate path. She also noted that monetary policy is becoming meaningfully less restrictive, suggesting that the ECB is nearing the end of its rate cuts unless new disruptions occur.

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