TLDR
- ECB lowered key interest rates by 25 basis points, with deposit rate now at 2.5%
- This marks the sixth rate cut in nine months as inflation approaches the 2% target
- Economic growth forecasts have been revised downward due to trade uncertainties and weak investment
- The ECB describes its policy as becoming “meaningfully less restrictive” for firms and households
- Future rate decisions will follow a “data-dependent and meeting-by-meeting approach” with no pre-commitment to a specific path
The European Central Bank (ECB) cut interest rates for the sixth time in nine months on Thursday, reducing its three key rates by 25 basis points as inflation in the eurozone moves closer to the bank’s 2% target.
The deposit facility rate, which is the main rate the ECB uses to steer monetary policy, now stands at 2.5%. The main refinancing operations rate was lowered to 2.65%, while the marginal lending facility rate was cut to 2.90%.
These changes will take effect from March 12, 2025. The ECB described its current monetary policy as becoming “meaningfully less restrictive,” noting that interest rate cuts are making new borrowing less expensive for businesses and households.
According to the central bank, the decision was based on an updated assessment of inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission. The ECB’s Governing Council confirmed that the disinflation process is “well on track.”
The ECB staff projections now see headline inflation averaging 2.3% in 2025, before falling to 1.9% in 2026 and stabilizing at 2.0% in 2027. The slight upward revision for 2025 reflects stronger energy price dynamics compared to previous forecasts.
For inflation excluding energy and food, the ECB projects an average of 2.2% in 2025, 2.0% in 2026, and 1.9% in 2027. The bank stated that most measures of underlying inflation suggest inflation will settle around the 2% medium-term target on a sustained basis.
Inflation remains high in Europe
Domestic inflation remains high in the eurozone. This is mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay, according to the ECB statement.
The bank noted that wage growth is moderating as expected. It also pointed out that profits are partially buffering the impact on inflation, suggesting that companies are absorbing some of the wage increases rather than passing them fully to consumers.
While the ECB’s monetary policy is becoming less restrictive, challenges remain. Past interest rate hikes are still transmitting to the stock of credit, creating a headwind to the easing of financing conditions.
The eurozone economy faces continued difficulties. The ECB has marked down its growth projections to 0.9% for 2025, 1.2% for 2026, and 1.3% for 2027.
These downward revisions reflect lower exports and ongoing weakness in investment. The ECB attributes these factors in part to high trade policy uncertainty and broader policy uncertainty in the region.
Thursday’s rate cut might be the last straightforward decision for ECB policymakers. Any move from next month onwards is expected to be subject to more heated debate as inflation concerns persist.
Germany’s recent move to increase military and infrastructure spending could potentially create fresh inflationary pressures. This development is likely to heighten concerns among some ECB officials.
The European economy faces further challenges from U.S. tariffs
At the same time, the eurozone economy may face additional challenges if the United States follows through with plans to impose “reciprocal tariffs” on every country that taxes U.S. imports. This would create further complications for Europe’s trade outlook.
ECB President Christine Lagarde was expected to address these risks during a press conference following the announcement. The central bank emphasized that it is “determined to ensure that inflation stabilizes sustainably at its 2% medium-term target.”
Looking ahead, the ECB stated it would not pre-commit to a particular rate path. Instead, it will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance, especially in the current conditions of rising uncertainty.
The bank’s future interest rate decisions will be based on its assessment of the inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
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