The European Central Bank cut its key interest rate by another 0.25 percentage points to 2.50% on Thursday, and revised its economic growth forecast downwards and inflation forecasts upwards.
The ECB stated that monetary policy is becoming “meaningfully less restrictive” and reiterated the ongoing data-dependent and meeting-by-meeting approach to interest rates at a time of rising uncertainty.
No governing council member opposed today’s decision, with only one abstention.
President Christine Lagarde said that the risks to the region’s economy remain tilted to the downside because of trade tensions and geopolitical uncertainty. She added that boost to infrastructure and defense expenditure from Germany’s spending plans could impact the inflation on the upside.
“Risks remain in Europe, but an overheating economy is not high on the list. Interest rates could fall as low as 2% in 2025. A structurally lower level of interest rates would be a boon for European equities, particularly those exposed to consumer spending,” said Michael Field, chief equity market strategist for Europe at Morningstar.
“The move will be well received by European equity markets, which we believe are still trading at a small discount to their fair value,”
Changes to the ECB’s Key Interest Rates
The ECB began its rate-cutting cycle in June, paused in July, and resumed its rate changes in September, October, December, and January. As of March 12, the three ECB key interest rates will stand at:
- Deposit facility rate: 2.50%
- Main refinancing rate: 2.65%
- Marginal lending facility: 2.90%
After today’s decision by the ECB, the gap between interest rates in the US and Europe widens. In January, the Federal Reserve maintained its key rate at its current range of 4.25%-4.50%, and markets expect that federal-funds will stay at the same level as January after the next FOMC meeting on March 19. According to CME FedWatch, which tracks the probability of changes to the Fed rate as implied by 30-Day Fed Funds futures prices, there is 91% probability of no change this month.
And the Bank of England made its third rate cut in six months in February, with the base rate now at 4.5%. What the BoE will do at its next meetings, starting with the one on March 20, is the subject of much debate among economists. Sweden’s Riksbank will meet on March 20, and no cut is expected, according the four biggest Swedish bank projections. Finally, Swiss National Bank cut key interest rates to 0.50% in December 2024.
Eurozone Growth and Inflation Projections Revised
“The economy faces continued challenges,” the ECB staid.
Staff marked down their growth projections to 0.9% for 2025 from 1.1% previously, 1.2% for 2026 and 1.3% for 2027.
“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 ECB said in a statement.
As for inflation, the central bank’s staff now see headline inflation averaging 2.3% in 2025 from 2.1% previously, 1.9% in 2026 and 2.0% in 2027, with the upward revision in headline CPI due to “stronger energy price dynamics.” For inflation excluding energy and food, staff expect an average core CPI of 2.2% in 2025, 2.0% in 2026 and 1.9% in 2027.
Market Reaction to the ECB’s Rate Cut
After the announcement, the euro hit a four-month high at USD 1.0844, after a period of weakness for the US currency triggered by trade fears.
Carlo Alberto De Casa, analyst at Swissquote, said the rise in the euro against the dollar is “a signal that investors are betting on a less dovish ECB in the upcoming months. Or at least, an ECB less dovish than what was priced until a few days ago.”
German Bund yields are continuing to increase and are now up from 2.1% on Wednesday to 2.8% and the spread between eurozone government and Germany debt has widened.
European stock exchanges were modestly weaker after the news.
How Many Times Will ECB Cut Interest Rates in 2025?
Short-term interest rate markets are pricing ECB rate cuts at consecutive meetings through to June, taking the deposit rate to 2%, with a chance that the deposit rate is sub-2% before the end of this year.
UBS Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management, said in a note:
“In our view, the ECB is likely to continue cutting rates at a steady pace of 25 bps at each meeting until June, bringing the rate to 2%, but the risks to this forecast are balanced. Increased geopolitical uncertainty and the threat of tariffs on EU exports to the US represent a risk to growth, which could prompt the ECB to cut rates further to support the economy during the year.”
Simon Dangoor, head of fixed income macrostrategies at Goldman Sachs Asset Management, said in a note after the announcement.
“Investors need to consider the higher uncertainty about the near-term outlook for the ECB. We hold lower conviction on European front-end rates, given the lack of a clear directional skew, and we prefer steepeners given the additional issuance to finance fiscal expansion in Germany and likely a higher term premium resulting from an improved medium-term growth and inflationary outlook.”
Michael Krautzberger, global CIO fixed Income at Allianz Global Investors, wrote in a note on March 4: “Over the near term, we broadly subscribe to this pricing given the risks still facing regional activity.”
“Euro area growth continues to be lackluster despite hints that the largest economy in the region, Germany, is showing signs of life. Moreover, growing tensions in the relationship between the US and Europe on trade and security policy, as well as structural growth challenges, represent the key factors hindering hopes of a more durable Euro area economic recovery.”
Morgan Stanley added a rate cut in April, after weaker inflation and growth data. Now, the economists expect that interest rates will reach 2% in June, then a slower pace in rate cuts only at orprojections meetings.
“We change the timing but not the endpoint: we maintain our call for terminal interest rate of 1%, which would be reached in June 2026.”
Will the German Debt Plan Impact Future ECB Decisions?
Germany’s incoming chancellor, Friedrich Merz, announced uncapped defense spending and a massive infrastructure package on Wednesday, causing a surge in Bund yields.
According to economists, if the plan is approved by parliament, it will boost the German economy, with benefits for the eurozone overall.
Felix Feather, economist at Aberdeen Investments said the ECB will have to consider the implications for short-term cyclical prospects and long-term equilibrium interest rates.
“For the time being, we expect the ECB to continue to rapidly reduce rates to neutral, in view of the other headwinds weighing on the economy,” he said.
Luigi De Bellis, co-head of the Equita research team, said the German plan “reduces the risk for the economy to worsen and could limit the need for deep cuts by the ECB, with positive effects for Italian and European banks.”
Indeed, the risk of the ECB cutting rates more quickly than currently forecast remains the main downside risk to banks’ financial results, because banks revenue are generally impacted negatively in a low-rate environment, which can put pressure on their interest rate margin.
When Are the Next ECB Meetings in 2025?
- April 17, 2025
- June 5, 2025
- July 24, 2025
- Sept. 11, 2025
- Oct. 30, 2025
- Dec. 18, 2025
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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