The European Central Bank on Thursday cut interest rates by 25 basis points and updated the language in its decision to say monetary policy was becoming “meaningfully less restrictive.”
The cut brings the ECB’s deposit facility rate, its key rate, to 2.5% — a move that markets had widely priced in before the announcement.
ECB President Christine Lagarde said after the decision that it was a “result of substantive discussion,” with no Governing Council members opposing it, although one central bank governor abstained.
“Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up,” the central bank said in a statement Thursday.
This change in language from the ECB’s January comments — when the central bank was still characterizing monetary policy as “restrictive” — has been interpreted as a hawkish shift.
“Policymakers are clearly becoming more cautious about further rate cuts,” Capital Economics’ Jack Allen-Reynolds said in a note.
Morgan Stanley economists, meanwhile, said the change of tone indicated that a pause was in the cards, but that more rate cuts should be expected.
“The communication … suggests more rate cuts ahead – we expect the ECB to cut both at the April and June meeting. However, at the same time, it sets the stage for a pause, which we think will come in July,” they wrote in a note.
Lagarde said the change to the language had “meaning,” adding that the central bank was moving to a “more evolutionary approach,” taking into account its rate cutting journey so far.
The central bank’s six rate cuts over the past nine months have come amid lackluster economic growth in the region, and as the specter of tariffs on EU imports to the U.S. looms large.
Euro zone headline inflation remains below the 3% mark, despite picking up in the last few months of 2024.
Data published earlier this week showed that inflation in the region eased to 2.4% in February, down from January’s reading but coming in slightly higher than expected. So-called core inflation — which strips out food, energy, alcohol and tobacco costs — as well as services inflation also dipped after proving sticky for several months.
The ECB on Thursday reiterated that the disinflation process was “well on track,” but noted that domestic inflation remained “high.”
“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis,” it added.
Economic outlook adjustments
The central bank also released its latest economic projections on Thursday.
“Staff now see headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision in headline inflation for 2025 reflects stronger energy price dynamics,” the bank said.
In December the central bank had still been expecting inflation to average 2.1% in 2025.
The euro area’s seasonally adjusted gross domestic product, meanwhile, eked out a 0.1% increase in the fourth quarter, the latest reading from statistics agency Eurostat showed.
ECB staff projections on Thursday revised the outlook for the region’s economic growth lower, citing “continued challenges.” It is now expecting 0.9% growth in 2025, 1.2% for 2026 and 1.3% for 2027.
Previous projections had pencilled in 1.1% growth this year.
“The downward revisions 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 central bank said Thursday.
Tariff uncertainty
The Thursday rate decision comes as U.S. President Donald Trump pursues an aggressive global tariff policy and European leaders look to increase defense spending.
Tariffs on goods imported to the U.S. from Europe have not yet been announced, but have been repeatedly threatened by Trump. The extent of any such duties is currently unclear, and the option for negotiation might still be on the table.
Lagarde on Thursday said that risks to growth remained tilted to the downside, citing trade tensions.
“An escalation in trade tensions would lower euro area growth by dampening exports and weakening the global economy,” she said.
“Ongoing uncertainty about global trade policies could drag investment down. Geopolitical tensions, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, remain a major source of uncertainty as well.”
European countries are also looking to boost their defense and security budgets as relations between the U.S. and Ukraine have soured. An increase in defense spending could affect key economic markers like inflation and growth.
The ECB’s Lagarde addressed both the European Union’s ReArm plan and proposals for a fiscal shift in Germany, saying that they were a “work in progress” and that conclusions about how the plans would contribute to growth and impact inflation would be formed when more details become available.
“But one thing that around the table of the Governing Council was clear is that on both accounts that would be supportive to European growth at large and would be a boost to the European economy,” she said.
Looking ahead, Lagarde refused to be drawn on whether the central bank would hold rates steady at its next meeting in April. In response to a question from CNBC’s Annette Weisbach, Lagarde said the ongoing uncertainty meant it was more important than ever for the Governing Council to be data-dependent.
“If the data indicates to us that in order to reach [our] destination, the appropriate monetary policy should be to cut we shall do so, but if on the other hand the data indicates that it is not the case, then we shall not cut, and we will pause. So that’s really where we are: not precommitting, being data dependent, as ever, and deciding on a meeting by meeting basis.”
— CNBC’s Chloe Taylor contributed to this report.
