The European Central Bank cut interest rates again Thursday to boost the struggling eurozone but suggested easing could be nearing an end and warned of “rising uncertainty” amid massive German spending plans and US tariff threats.
It was the central bank’s sixth reduction since June last year, with its focus having shifted from tackling inflation to providing relief for the single currency area, which has been eking out meagre growth.
The quarter-percentage-point reduction brought the Frankfurt-based institution’s benchmark deposit rate to 2.5 percent.
The rate reached a record of four percent in late 2023 after the ECB launched a furious hiking cycle to tame energy and food costs that surged in the wake of Russia’s invasion of Ukraine.
In a statement announcing the decision, the ECB said the process of inflation coming down was “well on track” and it believed that it would settle around the central bank’s two-percent target.
Eurozone inflation eased slightly to 2.4 percent in February.
But it a sign of continuing price pressures, the ECB raised its inflation forecast for this year to 2.3 percent from a previous prediction of 2.1 percent.
Crucially, the ECB tweaked guidance to say that rates were becoming “meaningfully less restrictive”, suggesting they were no longer having a major impact on bringing down inflation.
The change in language is a signal markets had been on the lookout for, and which they believe suggests that policymakers are gearing up to halt rate cuts.
Highlighting the continued economic woes for the 20 countries that use the euro, the central bank trimmed its growth forecast for 2025 and 2026, to 0.9 percent and 1.2 respectively.
The bank also warned about “current conditions of rising uncertainty,” insisting it would make its decisions based on incoming data.
Uncertainty about the fallout from potential US tariffs — President Donald Trump has threatened a 25-percent duty on all EU goods — was already clouding the outlook and potentially pushing rate-setters towards hitting pause.
German spending plans
New plans announced Tuesday by Germany’s likely next chancellor Friedrich Merz to spend several hundred billion euros more on defence and infrastructure in the coming years could impact policymakers’ considerations, observers said.
The dramatic move was driven by fears that long-standing US security guarantees for Europe will be weakened under Trump amid a rush to end the war in Ukraine.
The proposals still need to be rushed through the German parliament, and their impacts are for now uncertain, although some analysts believe such a spending surge has the potential to stoke inflation and discourage further rate cuts.
Investors are now awaiting comments by ECB President Christine Lagarde at the post-meeting press conference.
Even before the German announcement, ECB policymakers were already asking how much further it should continue on the path to lower interest rates.
Isabel Schnabel, an influential ECB board member, told The Financial Times last month that policymakers were getting “closer to the point where we may have to pause or halt our rate cuts”.
“We can no longer say with confidence that our monetary policy is still restrictive,” she said.
Trump effect
In the United States, where the economy is in more robust health than in the eurozone, the Federal Reserve paused rate cuts recently after inflation rose and amid uncertainty about the future direction of Trump’s policy.
Lagarde has so far sought to avoid tipping the ECB’s hand and could stick with her mantra of making decisions “meeting-by-meeting” in her remarks after the rates announcement, observers said.
“Global uncertainties have increased significantly in recent weeks,” said Felix Schmidt, an economist from Berenberg bank, pointing to Trump’s tariff threats.
Given this “Lagarde will refrain from giving any clear forward guidance and will try to maintain maximum flexibility,” he added.
