ECB continues to cut interest rates to 2.5%

On Thursday, the European Central Bank (ECB) announced a reduction in its benchmark deposit rate by 25 basis points to 2.5%. This marks the sixth rate cut since June 2024, as the ECB seeks to stimulate economic growth by lowering borrowing costs for consumers and businesses across the eurozone.

The eurozone economy has been facing significant challenges, including sluggish growth and subdued inflation. Recent data indicated zero growth in the last quarter of 2024, prompting concerns about a potential recession. Additionally, global trade tensions, particularly the imposition of US tariffs on EU goods, have heightened uncertainty, adversely affecting investment and consumption.

ECB President Christine Lagarde emphasised the negative impact of these trade disputes on business confidence and economic decisions.

She noted that the rate cut aims to counteract these headwinds by making borrowing more affordable, thereby encouraging spending and investment.

The ECB’s latest projections reflect a cautious outlook. The central bank has revised its GDP growth forecast for 2025 downward to 0.9% from the previous estimate of 1.1%, citing reduced exports and investment uncertainties as contributing factors. Inflation is expected to average 2.3% in 2025 and 1.9% in 2026, aligning closely with the ECB’s target of maintaining inflation rates below, but close to, 2% over the medium term.

Following the ECB’s announcement, the euro strengthened against both the US dollar and the British pound, indicating market confidence in the central bank’s measures to support the economy. European stock markets exhibited mixed reactions, reflecting investor uncertainty about the effectiveness of monetary policy in addressing the current economic challenges.

While the recent rate cut demonstrates the ECB’s commitment to supporting the eurozone economy, President Lagarde indicated that future monetary policy decisions would be data-dependent. She highlighted that the central bank is prepared to adjust its policy stance as necessary, considering evolving economic indicators and external factors such as global trade developments and fiscal policy changes within member states.