The European Central Bank on Thursday updated its language in its decision to cut interest rates by 25 basis points and state that monetary policy is “meaningly less restrictive.”
Due to the reduction, the ECB’s deposit facility rate, the key rate, is 2.5%. This is a movement that the market had widely priced before its announcement.
ECB President Christine Lagarde said there were no board members opposed to it after the decision that it was “the result of substantial debate,” but one central bank governor abstained.
“Interest rate cuts have made new borrowings cheaper for businesses and households and increased lending growth, meaningfully less limiting monetary policy,” the central bank said Thursday.
Language change from the ECB’s January comment – interpreted as a Hawkish shift when central banks still characterised monetary policy as “restrictive.”
“Policymakers are clearly cautious about further interest rate cuts,” Capital Economics’ Jack Allen Reynolds said in a memo.
Meanwhile, an economist at Morgan Stanley said the tone change showed a pause on the card, but that more rate cuts should be expected.
“Communication… suggests more rate cuts ahead. We hope that the ECB will be cut in both April and June meetings. At the same time, we will set a stage of suspension that we think will come in July,” they wrote in a memo.
By 2:53pm in London, the euro had risen 0.34% against the dollar. Meanwhile, the Eurozone government’s bond yields have already risen amid the global bond sales, but have already risen. Germany’s 10-year bond yield continued on an upward trajectory after the ECB decision, exceeding nine basis points.
The six central bank rate cuts over the past nine months have fallen into a massive appearance due to poor economic growth in the region and the large ghost of tariffs on EU imports into the US.
Despite picking up in the final months of 2024, inflation in the Eurozone headlines is below the 3% mark.
Data published earlier this week showed that inflation in the region fell to 2.4% from reading in January, but slightly higher than expected. We also soaked the so-called core inflation (eliminating the costs of food, energy, alcohol and tobacco) and service inflation, which we dipped after months of proven stickiness.
The ECB on Thursday reiterated that the developmental process is “going smoothly,” but noted that domestic inflation remains “high.”
“Most measures of underlying inflation suggest that inflation will remain around the mid-term target, where it is maintained,” it added.
Adjusting the economic outlook
The central bank also released its latest economic forecast on Thursday.
“Staff currently sees headline inflation averages of 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision of headline inflation in 2025 reflects an enhanced energy price dynamics,” the bank said.
In December, the central bank still expected inflation to average 2.1% in 2025.
Meanwhile, seasonally adjusted domestic production in the Euro area rose 0.1% in the fourth quarter, according to the latest reading from the statistical agency shown by Eurostat.
ECB staff forecasts on Thursday lowered the outlook for economic growth in the region, citing “continued challenges.” Currently, growth is expected to be 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027.
Previous forecasts were to have pencils adjusted at a growth of 1.1% this year.
“The downward revisions for 2025 and 2026 reflect the decline in export volumes and continued weaknesses in investment, in part due to trade policy uncertainty and broader policy uncertainty,” the central bank said Thursday.
Tariff uncertainty
The price decision on Thursday comes as US President Donald Trump pursues aggressive global tariff policies and European leaders aim to increase defence spending.
Tariffs have not yet been announced on goods imported from Europe to the US, but have been repeatedly threatened by Trump. The scope of such obligations is currently unknown, and negotiation options may still be on the table.
Lagarde said on Thursday that risks to growth remained leaning towards the negative side, citing trade tensions.
“Escalation of trade tensions will reduce eurozone growth by attenuating exports and weakening the global economy,” she said.
“Continued uncertainty regarding global trade policy could reduce investment. Geopolitical tensions, such as Russia’s unfair war against Ukraine and tragic conflicts in the Middle East, have also remained a major source of uncertainty.”
European countries are trying to boost their defense and security budgets as US-Ukraine relations deteriorate. Increased defense spending can affect key economic markers such as inflation and growth.
ECB Lagarde addressed both the European Union’s REIRM plan and Germany’s proposal for financial change, saying they would be “on-going work” and would form conclusions on how the plan will grow and impact when more details become available.
“But one thing that was clear around the tables of the governing council is that both accounts support Europe’s growth and boost the European economy,” she said.
Looking ahead, Lagarde refused to be drawn out whether the central bank would remain stable at the rate at the next meeting in April. In response to a question from CNBC’s Annette Weisbach, Lagarde said the ongoing uncertainty means that it is more important than ever for governing councils to become data-dependent.
“If data shows us that proper monetary policy should be reduced to reach (our) destinations, we need to do so, but if data shows that it is not, we should not cut.
– CNBC’s Chloe Taylor contributed to this report.
